What Investors Can Expect From Large-Growth Funds

One expert says large-growth stocks tend to take off at this stage of a recovery.


Large-growth stock funds are typically a rather aggressive asset class. Investors will find funds in this category that double in value one year then lose a third of it in the next. Navigating this large asset class can be tricky, but there are large-growth funds that perform well in up markets and do a decent job protecting against the downside.

[Use our Mutual Fund Score to find the best investments for you.]

These funds should generally be reserved for younger investors with a long time horizon because at times their returns can be volatile. “In the long-term, they may offer a little better returns potentially but also more downside risk in the short term,” says Morningstar analyst David Kathman. If you’re nearing retirement and your primary goal is preservation of capital, Kathman says these funds may not be for you.

To understand the up-and-down nature of the category, it’s important to examine the types of companies that managers generally choose. They are stocks of large, well-established companies that are generally growing their earnings faster than other companies in the same industry. Generally, growth stocks are considered more risky than value stocks, which are shares of companies that are believed to be undervalued and therefore good long-term investments.

In the down market in 2008, the average large-growth fund plummeted 41 percent, whereas the average large-value fund fell 37 percent and the average large-blend fund (meaning a mix of value and growth stocks) was down 38 percent, according to Morningstar. Large-growth funds outperformed in the rally in 2009 when they shot up 36 percent, while large-value and large-blend funds each finished up 24 percent and 28 percent, respectively.

The nature of the growth of these companies may be particularly appealing for some investors right now. Adam Bold, founder of the Mutual Fund Store, says that after coming out a downturn, small-cap stocks generally rally first and large-growth stocks are usually not far behind. “As we come out of the recession, there are some companies that are going to recover faster, and really the best measure of whether they’re recovering and at what speed is earnings,” Bold says. “So if you have a manager that’s good at picking those growth stocks, and they are in fact growing faster, then those are probably going to be stocks that do particularly well during this environment.”

With that in mind, here is a list of five funds that have received high marks, according to U.S. News’s Mutual Fund Score.

Parnassus Workplace Fund (PARWX). All of the funds in the Parnassus family are socially responsible funds—meaning the use screens to weed out companies that don’t meet certain standards or are in industries like alcohol, tobacco or gambling. What sticks out about the Workplace Fund is that it has a special emphasis on investing in companies that are considered great places to work. Management uses Fortune’s annual list of the “100 Best Companies to Work For” as a starting point. Of those 100 names about 65 or so are publicly traded. Manager Jerome Dodson then selects the most attractive companies from that list along with more that his team has found that they consider great places to work. “I know, certainly, that if I’m working for a company that I like, and where I’m treated well, that I’m going to work harder and try to make the business a success,” Dodson says. “So if you believe that, then I think that explains a lot of the reason for the success of the Workplace Fund.”

Jensen J (JENSX). The team at Jensen chooses stocks from a very select universe. Comanager Bob Millen says the companies they choose from are those that are domiciled in the United States and have reported at least a 15 percent return on equity (a measure of how efficient a company is using its equity in terms of producing profit) for 10 consecutive years. After running that screen, the team usually selects about 30 companies from a group of about 150 companies to put into their fund. Management tends to buy companies that they believe are trading at a discount that generally grow their earnings by at least double-digits every year. Jensen is regarded as one of the more conservative picks in the category. Millen says management is very concerned with protecting the fund against downside risk. “We cut off the highs a little bit, but we definitely cut off the lows,” Millen says. “In the baseball vernacular I like to say we hit lots of singles and doubles, but we don’t strike out very much.”

Monetta Young Investor (MYIFX). Comanager Bob Bacarella says his fund has a three-pronged strategy. He acknowledges that many managers have trouble beating the returns of the S&P 500 Index over the long term. To combat that he puts half of the fund’s total assets into a few exchange-traded funds that track the S&P 500 Index. The remainder of the fund’s assets are placed in what Bacarella calls “best of breed” companies and some short-term trading opportunities that he sees in beaten-down industries like banking, automotives and the airlines. The best of breed companies include well-known consumer discretionary names like Disney, Coca-Cola, Amazon and Apple. “They tend to outperform in down markets because people gravitate toward the more defensive stocks, and in up markets they tend to have a higher beta characteristic, which means that they propel ahead,” Bacarella says.

Evergreen Large Company Growth Fund (EKJAX). Management at this fund runs a fairly concentrated portfolio of stocks—only 37 as of the end of March. Technology companies like Apple, Google and Oracle make up a large part of the fund’s assets along with fairly large holdings of healthcare-related companies like Biogen and Amgen. In the fund’s latest filing, management says, “Because we are long-term investors, we anticipate that large company growth fund’s portfolio turnover may be somewhat lower than that of a typical growth fund.” The turnover rate—a measure of how often managers change holdings—is low at only 13 percent. In the same filing, management says they typically invest with a time horizon of five years and beyond.

PrimeCap Odyssey Stock Fund (POSKX). With only about $300 million total assets under management, this fund is the smallest of the six funds managed by Primecap. A small asset base generally makes it easier for the fund to move in and out of positions. It also boasts a low turnover rate. As of the end of December 2009, the fund is invested in about 90 stocks. Almost a third of the fund’s total assets are in the healthcare sector in names like Eli Lilly, Roche and Amgen.