Thursday, January 26, 2006

Sluggers Among Large-Cap Growth

News Analysis
January 26, 2006

Sluggers Among Large-Cap Growth

Funds focusing on these stocks appear to be primed for a comeback. Here are some that earn high marks from analysts

Large-cap growth funds finally may be due for a comeback. After all, the companies they invest in -- typically ones with market capitalizations of $10 billion or more and strong growth prospects -- were out of favor for almost five years. According to Boston-based Financial Research, investors yanked $10.8 billion out of these funds in the first 11 months of 2005, while pouring $18.7 billion into their large-cap value brethren.

Now, the beleagured funds have improving performance on their side. Growth stocks overtook value stocks in the second half of 2005, according to data from Chicago-based investment researcher Morningstar -- and many Wall Street pros don't expect them to look back (see BW, 12/29/05, All Aboard the Growth Train"). In a recent survey of 112 U.S. money managers, Russell Investment Group found 80% favored large-cap growth stocks above all others.

BARGAINS GALORE.  Larger companies happen to be paying higher dividends than they did in the past, thanks to a 2003 tax law. And historically, large-cap growth tends to do better in the later stages of a market expansion, when investors are willing to shoulder more risk (see BW Online, 12/21/05, "Investing Trends to Watch in 2006").

At the same time, large-cap growth stocks are cheaper in a relative sense than they've been in years, some analysts say (see BW Online, 1/11/06, "Equity Funds Reveal an Evolving Market"). "There are a lot of bargains out there in large-cap growth stocks," says Brian Gendreau, investment strategist for ING Investment Management.

So where should fund investors put their money? There are 1,000 large-cap growth funds, and they come in many shapes and sizes. Some large-cap growth managers are willing to bet on companies perceived as riskier in exchange for higher returns, while others play it cautious. Smaller asset sizes might make some funds more nimble. And of course, expenses vary.

"ALMOST BORINGLY STRONG."  A trio of T. Rowe Price funds earn analysts' stamp of approval. Philip Edwards, managing director of Standard & Poor's Investor Services, likes T. Rowe Price Growth Stock (PRGFX ) for its solid performance and low risk. "It's consistently and almost boringly strong," he says. Manager Bob Smith has beaten his peer average by about 3% since taking the helm in March, 1997. The fund has a modest 0.72% expense ratio.

Morningstar senior fund analyst Paul Herbert points instead to T. Rowe Price New America Growth (PRWAX ). At $873 million in assets, it's considerably slimmer than its $10.7 billion big brother. It has an expense ratio of 0.91%.

The fund also holds a hefty tech stake, with more than 20% of the portfolio in software and hardware stocks. Herbert sees tech stocks leading the way in case of a large-growth rebound.

ENERGY-PRICE IMPACT.  New America Growth manager Joseph Milano agrees the economic underpinnings are right for large-cap growth this year. But he cautions that runaway energy prices may still curtail the stocks' ascendance. "When we're looking back, one way or the other we're going to say the returns have been dictated by what happened in energy," he says.

T. Rowe Price Blue Chip Growth (TRBCX) has also posted consistently solid returns, outpacing a typical peer in four of the last five years. "This fund does a pretty good job of being selective along the way and not just taking the largest companies out there," says Jeff Tjornehoj, a research analyst with fund tracker Lipper. Managed by Larry Puglia, this large-cap growth fund has an expense ratio of 0.85%.

Investors looking for something more cautious may want to consider ABN Amro/Montag & Caldwell Growth (MCGFX). Morningstar's Herbert calls it "an old-school growth fund," because it invests in classic growth stocks such as Procter & Gamble (PG ) and Johnson & Johnson (JNJ ).

AGGRESSIVE PEER.  The fund's skipper, Ronald Canakaris, hunts for bargains like a value manager. "We're not willing to pay any price for growth," he says. So he buys shares of companies with reasonable valuation as well as strong earnings growth. The fund's returns lag some rivals because it takes fewer risks, but its expense ratio is a relatively low 1.02%.

Almost the exact opposite in terms of risk and return is the doughty TCW Galileo Select Equities (TGCNX). "If you're more interested in an aggressive large-cap growth, this is the other side of the universe," says Lipper's Tjornehoj.

The portfolio contains only about 25 stocks, with Progressive Auto Insurance (PGR ), Genentech (DNA ), and Yahoo! (YHOO) among its largest holdings. Its annualized three-year returns top 20%, placing the fund in the highest 6% of funds in its Morningstar category. And it has a below-average 1.2% expense ratio.

GROWTH GIANT.  Another fund for intrepid investors is Harbor Capital Appreciation (HCAIX), subadvised by Jennison Associates. "It's a fund you have to take on a little more risk to enjoy," says S&P's Edwards. But the returns can be worth it, as the fund trounced its category average each of the past three years. Manager Spiros Segalas has steered the portfolio since May, 1990. Its expense ratio is 1.1%.

The elephant in the large-growth room is Growth Fund of America (AGTHX), and for good reason. American Funds' $128.1 billion flagship ranks in the top percentile of its category for 10-year annualized returns. It has a low 0.66% expense ratio and a front-end load of 5.75%.

S&P's Edwards credits the fund's multi-manager approach, which lets nine different portfolio counselors each pick stocks individually. But he suggests caution regarding the fund's ballooning asset size.

TIME TO REBALANCE?  Morningstar's Herbert also recommends two smaller American Funds offerings, New Economy (ANEFX ) and Amcap (AMCPX ). Roughly a quarter of both funds' holdings received four- or five-star ratings from the research outfit's stock analysts.

While the shift to large growth stocks would be welcome news for the group, fund watchers advise against trying to chase the market's twists and turns. "It's good to have some exposure to large growth in your portfolio independent of intraday dramatic moves," Herbert says. Indeed, a rebalancing of your portfolio to take advantage of the comeback of growth stocks, especially if it hasn't been touched in a while, could boost your returns down the road.

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