For some investors, it's all about chasing hot growth stocks with skyrocketing share prices. You might make a lot of money, but you may get burned if you hang onto it too long. If you're more interested in protecting your investments, large cap value stocks may be a better fit.
Generally, large-cap value funds invest in well-known companies that are undervalued and trading at a cheap price. The stocks within these funds often pay dividends, which can provide a cushion during hard times. Such funds may not shine during strong market rallies, but the undervalued stocks in their portfolios can provide consistent returns over the long term.
"Being a large-value investor means looking for big, established companies at a relatively low-cost, therefore you don't have a lot of price risk," says John Rekenthaler, Morningstar's vice president of research. "It's really, for the most part, meant to be about a low-risk strategy."
The funds that have risen to the top of U.S. News's large-value list have done so, in part, because they've successfully offered downside protection during market slides. Some large-value fund managers seek safety in cash if they sense that a selloff is imminent. Others focus on stocks that have paid strong dividends in the past and look poised to continue increasing dividends in the future. Often, these invest in sectors like healthcare, consumer staples, and financials (because of the industry's historically high dividend payouts) rather than traditional growth sectors like technology.
With that in mind, here are five of U.S. News's top-ranked large-value funds
Valley Forge (VAFGX). You've probably never heard the name Bernard Klawans. The 89-year-old retired aerospace engineer, who started managing money in the early 1970s, has never had any formal training in the fund business. His strategy is simple: Invest in big-name value stocks that perform well over time, and flock to cash when the market is down. "If you buy them low and sell them high, you make money," Klawans says. "I'm pretty conservative, so I only deal with the big stocks." In 2008, Klawans kept as much as 64 percent of the fund in cash. He runs a fairly concentrated portfolio: As of the end of June, the fund, which has about $15 million in assets, held only 28 stocks. Now, Klawans says he's worried that the market could plummet again, so he moved 21 percent of the fund's assets into cash. The fund has returned roughly 6 percent annualized over the past 10 years, which places it in the top 5 percent of its category. Its 1.37 percent annual fees are rather high for its category.
Forester Value (FVALX). This fund has historically protected against the downside. In 2008, Forester was the only domestic stock fund to finish the year with a positive return, according to Morningstar. Manager Thomas Forester focuses on companies with low price-to-earnings ratios because he believes they are the best performers over time. For now, Forester says he's somewhat concerned with the strength of the economic recovery. Almost 20 percent of the fund's assets are currently in cash. "I'd say it's a yellow light," he says. "We're a little cautious right now." Forester currently favors healthcare and consumer staples. He thinks many healthcare companies are undervalued (given concerns over the passage of healthcare reform), and he believes consumer staples like Heinz and Kraft are a safe bet in a slow growing economy. For now, he's staying away from the big banks because he believes their balance sheets could suffer damage in the future because of increased foreclosuers by homeowners. Over the past 10 years, the fund has returned an annualized 5 percent. The fund's annual fees are 1.27 percent.
Cullen High Dividend Equity (CHDEX). The fund's strategy is in the name. Comanager John Gould says he looks for companies with low price-to-earnings ratios and high dividend yields. Management won't consider a stock unless it's yielding at least 3 percent. The portfolio typically holds about 20 to 30 stocks. "We're benchmark-agnostic," he says. That means management generally doesn't follow a given benchmark index. Gould likes companies that not only pay high dividends, but also continually increase their payouts. Over the past five years, the fund has returned a bit more than 1 percent annualized. It charges 1 percent in annual fees.