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8 Growth Funds Beating the Broad Market

For two straight years, Fidelity Contrafund (FCNTX) didn’t make a single appearance on the SmartMoney.com fund screen even though its performance track record qualified it for inclusion. The problem was that the fund was closed to new investors, which violates one of our long-standing criteria. After all, what good is there in writing about a fund most readers can’t put their money into? Fortunately, that situation changed last December when Fidelity reopened the fund to all comers.

Contrafund has been making our screens ever since, and it’s easy to see why. Will Danoff, who’s been running the large-company growth fund for almost 20 years, is a throwback type who uses extensive research and management interviews to find companies the market under-appreciates. Even as Danoff’s fund ballooned to more than $50 billion — a level of assets that would handcuff most managers — he kept it above water by investing throughout the market-cap spectrum, keeping turnover low and holding cash during a raucous 2008. According to Lipper, Contrafund has failed to beat the S&P 500 only three times during the last decade.

Contrafund is one of the finalists on a screen we did this week that focuses on large-cap growth funds. We started with a universe of 864 funds and share classes and quickly narrowed that field to 104 by knocking out offerings that levied a load fee. We then looked for funds with low expense ratios and top-tier track records over the trailing three- and five-year time periods. Since the stock ticker market has been so up-and-down lately, we also required the offerings to have a year-to-date return that exceeded that of the S&P 500. We wound up with a list of eight funds that are on the table below.

We last ran this screen in late February. That three-month span is about half the time we usually wait to revisit a particular topic. Back then, large-cap growth funds — and mid, multi and small ones, too — were showing signs of surging ahead of their counterparts on the value side. A week after we published that screen, the Dow Jones Industrial Average bottomed out and has since rallied around 30%. Other major indexes have bounced back, too. That rally lifted many sectors, especially technology, a bellwether of growth funds. Given all the market action, we thought it was time to check back in. Indeed, the average large-cap growth fund has gained 9% this year, according to Lipper, compared to a 1.4% increase for the typical S&P 500 index fund.

“We’ve been aggressively weighted toward growth for a while,” says Jeffrey Phillips, chief investment officer at Rehmann Financial in Troy, Mich. He says that their strategy hurt a bit last year, but “we expect growth to [outperform] for maybe two to three more months. People are looking for companies that can make money in this environment.”

The category’s performance has rekindled the old growth vs. value debate in many money manager offices around the country. Last year, large-cap value funds beat the average return of their growth brethren by almost three percentage points. That’s actually been the historical norm, too. Ibbotson, the market data firm and a division of Morningstar (MORN), found that a $1 investment in value stock tickers in 1968 would have been worth $68.38 by the end of 2007, a compounded annual rate of return of 11.4%. That same dollar put into growth stock tickers would have only grown at a 9.2% rate to $31.09.

However, there are times when growth has soared past value. If savvy investors can catch that wave — and bail out in time — they can rack up big profits. That was certainly the case in the late 1990s. And growth stock tickers tend to lead out of downturns like the one we’re in now.

That said, it’s far from certain whether this will be a prolonged period of outperformance for growth funds. Growth stock tickers typically depend on companies and consumers spending cash, an uptick in M&A deals, and enough projected earnings growth to convince investors to pay a rich premium over value stock tickers. Phillips thinks a further increase in unemployment and an erosion of consumer spending during the summer could cause some profit taking that would cool the category off a bit.

So he’s been leaning some of his client portfolios heavily toward growth while keeping a close eye on the positions. He prefers funds like Amana Growth (AMAGX) and American Funds’ Growth Fund of America (AGTHX). Those are well-respected offerings, but they don’t make our cut in this screen: Amana, which is classified as a multi-cap by Lipper and Growth Fund of America, charges a load fee.

Two funds that did make our list — and are worthy of consideration in your portfolio — are Contrafund and Harbor Capital Appreciation (HCAIX). Both have experienced managers, charge low fees and have decent track records. They also happen to be easily outpacing the S&P 500 this year.

The Criteria: The funds in our table are part of Lipper’s large-cap growth classification. They are open to new money, require a minimum investment of less than $5,000 and charge annual expenses of under 1.5%. Their performance track records over the trailing three- and five-year time periods put them in the top 25% of the category. They are also beating the return of the S&P 500 during 2009. As usual, we did not include load funds.

Surging Growth Funds
Name Ticker Assets
($ Millions)
YTD
Return
(%)
3-Year
Average
Annual
Return (%)
5-Year
Average
Annual
Return (%)
Expense
Ratio
(%)
Source: Lipper
Note: Data as of May 28, 2009
American Century Growth TWCGX 2660.7 8.09 -4.66 -0.07 1.00
Aston/Montag & Caldwell Growth MCGFX 958.7 7.67 -1.90 0.20 1.08
Columbia Select Large Cap Growth UMLGX 843.6 17.36 -4.32 0.88 1.16
DWS Capital Growth SCGSX 520.0 3.33 -5.36 -0.76 0.79
Fidelity Contrafund FCNTX 44260.3 4.17 -5.56 2.39 0.95
Harbor Capital Appreciation HCAIX 490.9 12.37 -5.59 -0.25 1.05
Janus Research JAMRX 2472 13.65 -4.84 0.03 1.06
Sit Large Cap Growth SNIGX 286.1 6.98 -4.59 0.96 1.00
Recipe
  • Fund Classification = Large Cap Growth
  • Annualized 3-Year Return (%) = Display Only
  • Rank in Classification (%) (3 year performance) <= 25
  • Annualized 5-Year Return (%) = Display Only
  • Rank in Classification (%) (5 year performance) <= 25
  • Year-to-Date Return (%) >= 1.4%
  • Expense Ratio <= 1.5%
  • Load Fund (type) = No Load
  • Minimum Initial Investment <= $5,000
  • Open to New Investors = Yes
  • Total Net Assets ($ millions) >= 50

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