U.S. News is releasing a series of stories highlighting top-rated mutual funds in various categories. These funds have performed well over the long term, are rated highly among the industry's analysts, and have low minimum investments, making them accessible to all investors—big or small. This is the third piece in a series of stories highlighting 10 categories that make up U.S. News's 100 Best Mutual Funds for the Long Term.
Many large-cap value managers are the epitome of buy-and-hold investors. In this category, you'll find managers who seldom trade and invest with a long time horizon.
There are two types of value investors with one important distinction, says Morningstar analyst Michael Breen. One type invests in high-quality, dividend-paying companies with strong fundamentals that are trading at a cheap price. The other, Breen says, "tend to be a lot more very deep contrarian investors who will buy very troubled companies thinking that the [company is] going to turn it around."
Investors should first consider their risk tolerance before choosing among funds in this category. Out-of-favor companies may take a long time to rebound. Many managers pride themselves on making bets on beaten-down companies before the market recognizes the companies' potential to turn things around. Such funds may not shine during strong market rallies, but the undervalued stocks in their portfolios can provide consistent returns over the long term. Often, these funds 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.
Over long periods of time, large-value funds have consistently beaten large-growth funds, Breen says, mostly because investments that generate dividends help you compound capital over time. Another trait to note: "Many of the managers in this category are bottom-up investors, and they believe in concentrated portfolios," Breen says. The funds may invest heavily in a single sector of the market or in a few companies they have strong convictions about, which can make them risky choices.
With that in mind, here are U.S. News's best large-cap value funds for the long term:
Yacktman Fund (symbol YACKX). The managers of this fund run a concentrated portfolio of stocks that generate strong cash flows for a fairly long period of time. At times, when they believe the market is overvalued, they'll hold a decent amount in cash. (Currently, 10 percent of the fund's assets reside in cash.) Two of the fund's top three holdings are soft drink giants Coca-Cola and Pepsi. The fund has returned an annualized 12 percent over the past 10 years. Its annual expenses are 0.93 percent.
Invesco Van Kampen Growth and Income (ACGIX). This fund is currently heavy on financial services companies like JPMorgan Chase and Bank of America. Management tends to gravitate toward out-of-favor companies. At times, that strategy has meant trouble for the fund; its stake in BP and Anadarko Petroleum sank following the oil spill in the Gulf of Mexico. Those two picks have hurt the fund's recent returns, but over the long term, its performance has been steady. Over the past 10 years, the fund has returned 3 percent per year, on average. It charges annual fees of 0.88 percent.
California Investment Equity Income (EQTIX). This fund may take you for a bumpy ride, but it's long-term returns are among the highest in its category. Currently, its holdings are close in line with the S&P 500, which is unusual for the fund. Management will sometimes make big sector bets. Recently, Caterpillar has boosted the fund's returns, while big banking names like JPMorgan and Goldman Sachs have been somewhat of a drag on performance. Management looks for solid, dividend-paying companies to provide current income as well as capital appreciation to its shareholders. The fund has finished among the bottom of its category in several recent years, but over the past 10 years, it has gained an annualized 3 percent. Its annual fees are 0.99 percent.