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Who's Been Beating the S&P?

These managers have bested the index over three topsy-turvy years.

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With three months left in 2004, Bill Miller's streak of beating the S&P 500 Index's annual return with his  Legg Mason Value (LMVTX) looks to be in jeopardy. In 2003 he accomplished the feat for the 13th straight year, but this year the fund's 2.7% loss through Oct. 1, 2004, lags the S&P 500 by more than 4 percentage points. While Miller can make up ground on the bogy in a hurry, the clock is certainly ticking.

Miller's streak has been so celebrated because it's quite rare for an actively managed large-blend fund to beat the S&P 500 with such consistency. The domestic large-cap market is quite efficient, with many analysts and investors keenly watching each stock. In this environment, consistently gaining a research advantage on rivals is quite difficult. Plus, when a market is particularly efficient, expenses can easily be the difference between topping the index or falling short. The average large-blend fund (across share classes) charges about 1.25%, which proves to be a significant hurdle.

An even bigger hurdle lately has been the market's capacity for running hot and cold. In 2002 almost every area of the domestic stock market suffered, and the S&P 500 fell 22%. The following year was quite a turnaround, as the index rose more than 28% in 2003. So far in 2004 the S&P 500 index has risen about 3%, but with significant volatility. It rose sharply the first two months of the year, fell by fits and starts through early August, and then set a rocky course back to positive ground.

For a large-blend manager to post competitive returns in such different, consecutive years is an impressive feat. It therefore makes sense to track down the managers who've accomplished it as the starting point for a shopping list of actively managed large-blend funds. This type of search is simple to do using Morningstar's  Premium Fund Screener.

First, we want to limit our universe to domestic large-blend funds, and we'll also only look at one share class per fund. The next two lines screen for funds whose returns were higher than the S&P 500's in 2002 and 2003. Next we isolate funds whose year-to-date returns are higher than the bogy's. (Note: Because a few funds have returns so close to the index's, the number of funds that pass this screen is likely to change as the days and weeks pass). Line six of the search stipulates that the current manager must have been in place at least three years--in other words, he or she must be responsible for the portfolio in the years we're examining.  Finally, we're screening out index funds.

To run this screen for yourself, click  here. As of Oct. 8, 2004, this screen yields 22 funds.

The cliché holds that there's more than one way to skin a cat; this list shows that there have been at least a few different ways to top the S&P 500 Index over the past few years. We'll highlight a few.

 Goldman Sachs CORE U.S. Equity (GSSQX)
This fund is a solid alternative to a passively managed S&P 500 Index fund. The management team keeps the fund pretty closely in line with the bogy's market cap, sector weightings, and style. It then attempts to top the index through stock selection based on quantitative screens. While the fund's 1.15% expense ratio would seem to be quite a hurdle, the fund has edged out the bogy for the trailing five-year period ending Oct. 6, 2004. The team that manages this fund is also responsible for Goldman Sachs CORE Tax-Managed (GCTAX), another fund that makes our short list and has even more impressive gains this year.

 American Century Equity Growth (BEQGX)
This fund is in some ways quite similar to the Goldman Sachs offering. It cites the S&P 500 as its target, keeps sector and industry weightings close to the bogy, generally holds more than 100 stocks in the portfolio, and has a management team that makes heavy use of quantitative screens. But while the Goldman Sachs fund has remained pretty squarely in the center of the large-blend style box for the past few years, this fund has had shown a decided value bent since mid-2002. It's also a bit cheaper and has a longer record of index-topping returns.

 Selected American (SLASX)
Chris Davis and Ken Feinberg's portfolios actually show up three times on our list of funds: In addition to Selected American,  Davis New York Venture (NYVTX) and  AXP Partners Fundamental Value (AFVAX) also pass our screen. The managers' value-oriented plan for beating the S&P 500 doesn't involve looking like the index. The fund generally holds between 50 and 75 stocks and has sector weightings that are radically different from the index. For some time the fund has bet heavily on financials stocks, and currently boasts a nearly 52% weighting in them. This fund's returns have therefore diverged from the index's much more widely than the others listed here: In 1998 the fund trailed the index by more than 12 percentage points while in 2000 it topped the bogy by more than 18 percentage points. We're big fans of this shop's low expenses and fiduciary record.

 T. Rowe Price Spectrum Growth (PRSGX)
While the other funds that we've examined would be fine options for anchoring a portfolio, this fund aims to provide investors with a complete stock portfolio. Spectrum Growth is actually a fund of funds that contains a host of T. Rowe Price offerings chosen by a committee. While the funds change from time to time, the shifts aren't radical, and a group of core funds always holds substantial weightings. This fund, unlike the others we've described, holds international stocks--including emerging markets--as well as mid-caps and large caps. T. Rowe Price doesn't layer an extra expense ratio on top of this fund of funds the way that some other shops do.

Todd Trubey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.