Lean and Mean Large-Cap Funds
Concentrated portfolios are a key to their success.
There are around 1,700 large-cap funds in the United States, which, on average, hold about 150 stocks. A good chunk of these funds, though--about 500 of them--have 50 or fewer holdings. With a more concentrated portfolio, a manager's best ideas can really shine through. Staying focused on a smaller number of stocks may mean less diversification, but it also increases the likelihood that the fund's performance will stand out. That said, this uniqueness means that a concentrated fund's performance won't always move in lockstep with the typical peer, especially when the manager ups the ante by clustering the fund's holdings in a handful of sectors.
Concentration can be an effective tool--but only if it's put into the right hands. To help us identify effective, focused fund managers in the large-cap arena, we turned to the Morningstar Premium Fund Screener. We first limited the screen to large-cap funds that posted top third three- and five-year trailing returns. We also limited our search to managers who have been at the helm for at least five years. Finally, we required below-average fees and investment minimums of less than $10,000.
The Morningstar Premium Fund Screener pulled these focused core funds as of Feb. 25, 2008:
Brandywine Blue (BLUEX)
CGM Focus (CGMFX)
CGM Mutual (LOMMX)
Columbia Marsico 21st Century (NMTAX)
Columbia Marsico Focused Equity (NFEAX)
Excelsior Large Cap Growth (UMLGX)
FMI Large Cap (FMIHX)
Heritage Capital Appreciation (HRCPX)
ING Corporate Leaders Trust (LEXCX)
Jennison 20/20 Focus (PTWAX)
Marsico 21st Century (MXXIX)
Marsico Focus (MFOCX)
Neuberger Berman Socially Responsible (NBSRX)
Pioneer Cullen Value (CVFCX)
Sound Shore (SSHFX)
Transamerica Premier Equity (TEQUX)
Waddell & Reed Advisor Vanguard (UNVGX)
An Analyst Pick from each of the large-value, large-blend, and large-growth categories dots this list. We've long been fans of Sound Shore, Fairholme, and Brandywine Blue. All three boast long-tenured managers and seasoned analyst teams. Whether focusing on near-term earnings growth, in the case of Brandywine Blue, or latching onto beaten-down stocks, in the case of Sound Shore, concentrated portfolios have allowed the skilled stock-picking of these managers to stand out.
CGM Focus and CGM Mutual have two of the slimmest portfolios on this list, with around 20 stocks per portfolio. For these two funds, both run by Kenneth Heebner, high Morningstar Risk ratings have gone hand in hand with high Morningstar Return ratings over the past 10 years. Returns have also seesawed from the top of the category in one year and to the bottom in the next. This comes from Heebner's propensity to load up on sectors he likes, as he has very successfully done with energy and industrials over the past few years. All told, Heebner's high-conviction style has paid off handsomely for long-term shareholders, though his fast-trading makes this a better fit for tax-sheltered accounts.
FMI Large Cap also has one of the slimmer portfolios on this list, but in contrast to the CGM funds, it employs a conservative, low-turnover approach. Despite holding about 20 stocks, the fund is well diversified by sector. Management also pays close attention to valuation and focuses on high-quality companies. Volatility has actually been below the large-blend average, while its five-year record is among the best in the category.
Morningstar.com Premium Members can run this screen themselves by clicking here. Not a Premium Member? You can still run this screen by taking a free, 14-day Premium Membership trial. (Note that the results may change as funds come in or drop out of the screen over time.)
Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.