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With interest rate hikes scaring money out of the stock market, consumer spending rising, and fuel costs climbing, you couldn’t ask for a better backdrop for large-cap value funds. The reason: Large company shares and cheaper priced, or value, stocks tend to hold their worth better in uncertain stock markets. Also, well-established companies often share their profits with investors in the form of dividends.
With the Federal Reserve making definitive moves to nudge interest rates higher, Standard & Poor’s analyst Phil Edwards says large-cap value funds can be a good defensive holding to bolster any portfolio. “When the market is doing well, value funds — like all boats — will rise with the tide. Investors tend to turn to value, however, in uncertain times,” he says. “That’s when basic materials, industrial, and consumer staple companies hold up since people will spend money on their products regardless of the economy.”
For our list of top funds, we tapped the database of Morningstar, the Chicago-based company that tracks the mutual fund business. We searched for funds with the best five-year record — portfolios that have weathered the economic downturn and held up while small-cap companies have done well. It is worth noting that the six in our chart are also the most conservative: Managers for each fund kept portfolio turnover — the number of holdings shuffled or traded during the course of a year — under 40%. Typically, turnover eats up a portfolio’s total return in trading costs and taxes.
First place in our ranking went to the TCW Galileo Dividend Focused N (TGIGX). The fund returned 17.4% for 2004 and has averaged a 14.4% annual total return over the past five years. Diane Jaffee, the fund’s manager, has been in charge since 1986 and steered the fund toward undervalued stocks with an expected catalyst to boost their dividend yields above market averages. While the fund has recently carried a sizeable weighting in financial stocks, management hasn’t shied away from the likes of Microsoft or semiconductor manufacturers — companies typically not found in a value portfolio.
A second fund to consider is WM Equity Income A (CMPBX), a portfolio with a 10.4% average annual total return over the past five years and a yearly turnover of just 18%. Manager Richard Helm not only likes stocks that produce dividend income, he seeks out those that have a good chance of increasing the payout as well. This fund, too, has angled toward financial stocks of late, and carries a 23% weighting in that sector.
Large Value funds
RANKED BY 5-YEAR RETURNS