U.S. News is releasing a series of stories highlighting top-rated mutual funds according to 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 ninth piece in a series of stories highlighting 10 categories that make up U.S. News's 100 Best Mutual Funds for the Long Term.
Last year's three least popular stock fund categories among investors were large-growth, large-blend, and large-value. Large-growth funds saw the most outflows, followed by large-blend and large-value, according to Morningstar. That means the three categories could be poised for strong gains in the next few years, experts say.
Each year, Morningstar compiles fund flows to pinpoint the three least popular stock fund categories, and advises investors to consider allocating a greater amount of their portfolio to the "unloved" funds of the year. "Fund flows are a contrarian indicator because [investors are] chasing what's gone up, by and large," says Russel Kinnel, Morningstar's director of mutual fund research.
Historically, "unloved" funds tend to outperform their benchmarks over the next three- and five-year periods. At the same time, the "loved" funds, or the three-best performing asset classes, generally lag their benchmarks. From the beginning of 1994 to the end of 2010, the "unloved" funds earned an annualized 9 percent, compared with an annualized 6 percent gain for the "loved" funds, according to Morningstar. (By comparison, the S&P 500 returned an annualized 8 percent over that time period, and MSCI World Index returned an annualized 4.6 percent.)
Large-cap funds saw outflows in 2010 for a number of reasons, experts say, but primarily because other asset classes like small-cap funds and emerging markets funds—which ranked among the "loved" funds—performed much better. Regardless of how they perform year to year, large-cap funds deserve a spot in your portfolio, Kinnel says. The large-blend category is home to some of the best-known index funds and a number of funds that offer varying strategies. Because of the range of options in this category, "you can really be choosey," he says, and search for experienced managers and funds with low expenses.
With that in mind, here are U.S. News's best large-blend funds for the long term:
Parnassus Equity Income (PRBLX). At this socially responsible fund, management uses a number of environmental and governance screens and avoids companies in industries like alcohol and tobacco. Management seeks companies with strong balance sheets, and shows a strong preference for dividend-paying stocks. About 75 percent of the fund's 41 holdings pay a dividend, according to Morningstar. But with a portfolio yield of just over 1 percent, yield-hungry investors may be disappointed. However, the fund's long-term returns rank among its category's highest percentile. Over the past 10 years, the fund has returned an annualized 7 percent. Its annual fees are 0.99 percent.
Madison Mosaic Disciplined Equity (MADEX). Co-manager Jay Sekelsky and his team prefer conservative blue chips like Johnson & Johnson that have demonstrated their earnings potential over the years. Other large holdings in the fund include tech giants Microsoft and Google and energy companies Chevron and Schlumberger. Currently, the portfolio contains about 50 stocks. Over the past 10 years, the fund has returned an annualized 2 percent. Its annual fees are 0.95 percent.
Oakmark Fund (OAKMX). According to Morningstar, "This traditionally was one of the purest value funds around, but lead manager Bill Nygren has found more fallen growth stocks that meet his valuation criteria." Currently, the fund holds about 50 stocks that are diversified across a number of sectors. Some of Oakmark's largest holdings include Oracle, Apple, and Medtronic. The fund has returned an annualized 6 percent over the past 10 years. Its annual fees are 1.11 percent.