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.
Amana Trust Income (AMANX). Manager Nicholas Kaiser must invest according to Islamic principals. That strategy paid off during the financial crisis because he wasn't allowed to invest in financial companies due to their high levels of leverage. He also doesn't invest in companies that are involved in the liquor, pornography, or gambling industries. The fund's turnover ratio is extremely low at just 5 percent. It has returned an annualized 6 percent over the past 10 years, and charges an annual fee of 1.25 percent.
Valley Forge (VAFGX). Bernard Klawans, an 89-year-old retired aerospace engineer who started managing money in the early 1970s, never had any formal training in the fund business before starting this fund. His strategy is simple: Invest in big-name value stocks that perform well over time and flock to cash when the market is down. 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 September, the fund, which has about $22 million in assets, held only 29 stocks. Klawans remains cautious and heavily invested in cash (28 percent of total assets). Over the past 10 years, the fund has returned 6 percent annualized. Its annual fees are 1.35 percent.
Forester Value (FVALX). Management aims to protect against the downside. In 2008, Forester was the only domestic stock fund to finish the year with a positive return. The fund's returns lack consistency, though. It has finished among the bottom of its category in recent years, such as 2009, that saw big rallies in the stock market. Generally, the fund won't lead in rallies, but it won't fall as far when the going gets tough. Manager Thomas Forester says he's avoiding big banks because their balance sheets are too complicated. The fund also maintains a fairly high cash stake (20 percent of total assets). Its biggest investments are in the healthcare sector, including names like Johnson & Johnson and Kimberly-Clark. Over the past 10 years, the fund has returned an annualized 5 percent. Its annual fees are 1.27 percent.
SunAmerica Focused Dividend Strategy (FDSAX). Management is focused on what its name suggests: dividends. The fund is concentrated with just 30 holdings, primarily in consumer goods companies like Kraft and Altria. Last year was a banner year for the fund. It beat the returns of the S&P 500 by more than 20 percentage points. The fund has historically lagged during big rallies but has been a decent protector of wealth in downturns. Over the last 10 years, the fund has returned an annualized 7 percent. Its annual fees are 0.94 percent.
Prudential Jennison Equity Income (AGOCX). This fund isn't a typical large-cap value fund. Its average market capitalization (or the size of the companies that it invests in) is a little over $8 billion. The fund will dabble in smaller companies such as B&G Foods, a manufacturer and distributor of food products including canned meats and beans. The stock is up 41 percent year-to-date. The fund also holds a fair share of foreign stocks (20 percent of total assets). Currently, the fund is overweight in utilities and telecom and is invested in names like Qualcomm, Century Link, and Comcast. The fund's performance in several years of the past decade landed it in the bottom of its category, but over the past 10 years, it has returned an annualized 4 percent. At 2.15 percent, the fund's annual fees are high for its category.
Auxier Focus (AUXFX). Morningstar describes the fund as a "go-anywhere" core holding—meaning that manager Jeffrey Auxier will invest in companies of all sizes, and sometimes bonds. The fund's average market cap is $20 billion. Bonds currently make up about a quarter of the fund's total assets. Auxier isn't afraid to stash some of its money in cash if opportunities are scarce. The fund is currently overweight in consumer goods companies like Philip Morris and Dr. Pepper Snapple Group. It has returned an annualized 7 percent over the past 10 years, and charges annual fees of 1.30 percent.
Homestead Value (HOVLX). The fund's management looks for out-of-favor companies, and once it finds them, holds on for the long haul. The fund typically holds companies for about 10 years, according to Morningstar. It is heavy on healthcare companies, with Hospira, Bristol-Myers Squibb, and Abbot Laboratories among the five largest holdings. Over the long term, the fund has consistently finished in the top half of its category, except for three calendar years over the past decade. The fund has returned an annualized 5 percent over the past 10 years. Its annual fees are 0.80 percent.