16 Growth Funds for the Recovery (Screens)

Published Feb. 27, 2009 at 5:00 a.m.

As a slew of news was unleashed on the markets this week -- the White House's $3.6 trillion budget plan, the Treasury's strategy to help ailing banks and an abundance of (mostly bad) earnings reports -- investors found themselves confounded by a wild ride of triple-digit increases and decreases in each of the past four sessions.

Amid the chaos, a new trend in the fund industry was quietly building steam: Growth stocks were trumping value -- by a noticeably large gap...That may seem unusual, as the conventional wisdom is that investors tend to flock to value stocks in tough times. However, some studies show that while value investors have the advantage over the long term, during select periods, growth stocks can greatly outperform.

That could be the case now. (Of course, performance is relative in this dismal economy.) According to Lipper, the average large-cap growth fund is down 10% this year vs. 17.9% for large-cap value. Growth funds can thank tech stocks, a bellwether investment among growth investors, for the lead.

This week we are going to give growth funds some bragging rights. (We'll look at value funds at a later date.) There are 829 large-cap growth funds in our database. We cut 731 load funds from that list and further narrowed the field by looking for ones that had good performance track records and cheap fees. Ultimately, we were left with 16 funds that we've listed in the table below.

We used to have some very clear definitions for what constitutes a value and a growth stock. While value stocks usually featured low price/earnings multiples and traded at a discount, growth stocks' future earnings prospects so exceeded the rate of the broad market that they typically traded at a premium. But now the lines between those distinctions are blurring.

The problem is that a key component to measuring stocks -- their earnings -- has been difficult to measure during the economic downturn. Companies are struggling to turn a profit -- and give correct guidance on their future prospects. That means when a highflying growth company reports disappointing numbers, it all of a sudden can look very much like a value play. And during a dismal earnings climate, a plain-vanilla value play can become very appealing to all kinds of managers.

Indeed, the valuation gap between the Russell 1000 Growth index and the Russell 1000 Value index -- two widely-watched industry benchmarks -- has been narrowing since 1998. At the beginning of that year, stocks in the value index traded for 18.6 times earnings vs. 30.3 times for its growth counterpart. Growth's pricey multiple at the time can be attributed, in large part, to the tech boom of the late 1990s Now, though, the Russell 1000 Value index trades at 10.5 times earnings and the Russell 1000 Growth is at 12.1 times earnings.

The closing of that gap is what has made it so tough to tell the difference between a growth stock and a value stock. "At the end of the day any valuation based on trailing earnings has no bearing going forward," wrote Laszlo Birinyi and Cleve Rueckert on Ticker Sense, the in-house blog of investment research firm Birinyi Associates. "Estimates for these supposed 'value' companies are so uncertain that they have become useless."

The good news is that the investment picture could come into focus soon. In downturns, investors like companies that can still manage to post above-average earnings, like health-care firms (one thing cash-strapped consumers rarely skimp on in troubled times is medical care). So growth stocks as a whole have historically lead other niches coming out of tough times. Two months may not be a long enough time period to actually declare this trend as fact, but it should get your attention.

Chase Growth (CHASX), Fidelity Contrafund (FCNTX), Harbor Capital Appreciation (HCAIX) and T. Rowe Price Growth Stock (PRGFX) are four of our favorite funds in this category. They sport low fees, decent long-term track records and in the case of Chase, Fidelity and Harbor, managers who have been in place for more than five years. Check out CGM Focus (CGMFX) if you can tolerate a wild ride. Manager Ken Heebner turns this $3.8 billion portfolio over about four times a year. He's managing the top-rated fund in the space over the three-, five- and 10-year time periods. But in 2008 he wound up losing 48%. We don't think Heebner has lost his touch, but we suggest using a bit of caution before you jump into his fund.

The Criteria: The large-cap growth funds on our list are open to new money, require a minimum investment under $5,000 and charge an annual expense ratio less than 1.5%. Their performance track records over the trailing three- and five-year time periods put them in the top 40% of their Lipper category. As usual, we did not include load funds.

Growth Trumps Value

Ticker	Name	Assets (In Millions)	YTD Return (%)	3-Year Avg Annual Return (%)	5-Year Avg Annual Return (%)	Expense Ratio (%)
Source: Lipper Note: Data as of Feb. 26, 2009
TWCGX	American Century Growth	2,415	-9.9	-11.1	-4.2	1.00
MCGFX	Aston/Montag & Caldwell Growth	556	-11.6	-8.5	-3.6	1.08
CGMFX	CGM Focus	3,847	-17.0	-6.7	4.5	0.99
CHASX	Chase Growth	355	-10.8	-11.3	-2.1	1.17
GEGTX	Columbia Large Cap Growth	734	-11.0	-13.3	-5.7	0.77
UMLGX	Columbia Select Large Cap Growth	711	-7.3	-13.2	-3.7	1.16
SCGSX	DWS Capital Growth	521	-10.5	-10.6	-3.8	0.79
SCQGX	DWS Large Company Growth	147	-9.9	-10.5	-4.2	1.08
FCNTX	Fidelity Contrafund	42,532	-11.2	-10.4	-0.6	0.89
HCAIX	Harbor Capital Appreciation	454	-6.1	-13.0	-4.3	1.05
JANSX	Janus Fund	6,844	-10.4	-12.9	-5.6	0.88
SNIGX	Sit Large Cap Growth	224	-9.8	-10.2	-2.5	1.00
PRGFX	T. Rowe Price Growth Stock	12,430	-6.6	-13.0	-4.9	0.71
VALLX	Value Line Larger Companies	184	-12.0	-13.1	-3.6	0.88
VIGRX	Vanguard Growth Index	4,084	-10.5	-12.8	-5.9	0.23
STRFX	Wells Fargo Advantage Large Cap Growth	229	-8.9	-12.7	-4.8	1.19

Recipe

• Fund Classification = Large Cap Growth
• Annualized 3-Year Return (%) = Display Only
• Rank in Classification (%) (3 year performance) <= 40
• Annualized 5-Year Return (%) = Display Only
• Rank in Classification (%) (5 year performance) <= 40
• Expense Ratio <= 1.5%
• Load Fund (type) = No Load
• Minimum Initial Investment <= $5,000
• Open to New Investors = Yes
• Total Net Assets ($ millions) >= 50
• Year-to-Date Return (%) = Display Only

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