March 13, 2003 — Unsettling headlines may be roiling the markets in recent months, but several long-standing investment features — notably stable fund management — can boost long-term fund results, as seen in the ten-year returns through February for large-cap funds.
The table below lists the ten best-performing large-cap funds, based on ten-year annualized returns through last month. Despite market gyrations over this period, these funds generated solid returns ranging from 15.2% to 12.1%.
“These funds are all run by experienced management teams that have been in place for over ten years,” said Rosanne Pane, mutual fund strategist for Standard & Poor’s. They also focus on “attractive valuations and cash flows,” she added.
Long-term experience, particularly in down markets, can be invaluable, said John W. Thompson, co-manager of Thompson Plumb Growth Fund (THPGX). “If you had your brains seared in some bad markets, you never forget it,” said Thompson, who has been on the Growth Fund’s team since 1992. Since he founded Thompson, Plumb & Associates in 1984, Thompson said managing money in the 1987 bear market has helped him in the current downturn.
Several of the ten funds have apparently built returns by holding stocks for long periods. Turnover, for most of the funds, is less than 25%. “If you have a fine company, why would you eliminate it?” said George Mairs III, manager of Mairs & Power Growth Fund (MPGFX). Last year, Mairs & Power Growth had a turnover rate of 2%. Quoc Tran, an analyst with Weitz Series Fund: Value Portfolio (WVALX) noted that “the best ideas tend to have a long shelf life.” Last year, Weitz Series Value Portfolio had a turnover rate of about 13%.
Looking at valuations apparently helped many of the ten best-performing large-cap funds, since six are value offerings, and three are blend funds. Following a value-oriented strategy may have helped over the long term, since large-cap value was the best-performing large-cap fund style category for the ten years through last month.
Given the steep bear market in recent years, a value bias may have lessened potential downside in this period. “Generally speaking, you have a margin of safety when you buy something at a discount,” said Weitz’s Tran. If something goes wrong, growth stocks tend to fall further than value stocks, Tran said.
Several of the best performing funds also have concentrated portfolios. S&P’s Pane notes that eight of the ten funds are focused offerings, where the ten largest positions account for 41% to 73% of total holdings. “When you manage money, you want your highest positions to be those where you have the highest convictions,” said Weitz’s Tran.
In contrast, John W. Thompson sees diversification as the key to his fund’s success. Thompson’s ten largest holdings make up about 16% of the portfolio. Diversification is advisable, according to Thompson, because “ultimately, you really don’t know what goes on under the roofs of these companies.”
A dose of humility may be helpful when considering overall returns. The funds on the ten-year best-performance list “may have had more of a tail wind than in other ten-year periods,” said David Williams, manager of Excelsior Value and Restructuring Fund (UMBIX). He notes that value funds have probably benefited over the last ten years by avoiding tech stocks, which have been hit hard during this period.
Ten Best-Performing Large-Cap Funds for Ten Years Through February 2003
Invest StyleTen-Year Annualized Ret Through 2/28/03 (%)Three-Year Annualized Ret Through 2/28/03 (%)
- Mairs & Power Growth Fund (MPGFX) Large-Cap Blend+15.19%+9.85%
- Smith Barney Aggressive Growth Fund/A (SHRAX) Large-Cap Growth+14.44%-13.83%
- Sequoia Fund (SEQUX) Large-Cap Value+14.21%+10.86
- Excelsior Value and Restructuring Fund (UMBIX) Large-Cap Value+14.19%-8.25%
- Legg Mason Eq Tr: Value/Prim (LMVTX) Large-Cap Blend+14.15%-10.17%
- Clipper Fund (CFIMX) Large-Cap Value+13.91%+13.25%
- Weitz Series Fund: Value Portfolio (WVALX) Large-Cap Value+13.15%+2.02%
- Thompson Plumb Growth Fund (THPGX) Large-Cap Blend+13.09%+6.31%
- Dodge & Cox Stock Fund (DODGX) Large-Cap Value+12.95%+6.11%
- Torray Fund (TORYX) Large-Cap Value+12.10%-3.74%
Fund Invest StyleAvrg Ten-Year Ann Ret Through 2/28/03 (%)Avrg Three-Year Annualized Ret Through 2/28/03 (%)
- Large-Cap Blend+11.13%-14.55%
- Large-Cap Growth+9.49%-22.19%
- Large-Cap Value+11.33%-5.11%
- Domestic Equity Funds+7.09%-12.01%
- S&P 500+8.65%-13.71%
Source: Standard & Poor’s. Total returns include reinvested dividends. Data as of 2/28/03.