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Mutual Fund Commentary

Large cap funds are always the safest option for risk-averse investors. These funds have exposure to large cap stocks, providing long-term performance history and assuring more stability than what mid-cap or small-caps offer. Most often, the large cap funds tend to duplicate the benchmarks – like S&P 500. These funds are ideal for investors with a long-term investment timeline.

Generally, companies with more than $10 billion market cap are considered as a large-cap firm. However market capitalization in case of funds does not reflect the size of the fund’s assets. Instead, it is an indication on what type of securities the fund invests in. Then again, large-cap funds can be classified under growth, value and blend funds. Each of them has their own fund objective, and caters to different investors.

Let’s look at what each of them has to offer to investors and which one suits the best for whom.

Growth Funds

When capital appreciation over the long term takes precedence over dividend payouts, growth funds become a natural choice for investors. These funds focus on realizing an appreciable amount of capital growth by investing in stocks of firms whose value is projected to rise over the long term.  However, a relatively higher tolerance to risk and the willingness to park funds for the longer term are necessary when investing in these securities. This is because they may experience relatively more fluctuations than other fund classes.

Value Funds

Investors looking for bargain, i.e., stocks at a discount, are mostly interested to invest in value stocks. Value stocks are the ones that pay dividends. Thus, investors not only get to buy securities at a discount, but they get a steady income or yield. Reinvesting the income is ideal for investors who are keen on value investing but are not looking for current income.

Blend Funds

Blend funds are a type of equity mutual funds which holds in its portfolio a mix of value and growth stocks. Blend funds are also known as “hybrid funds”. Blend funds aim for value appreciation by capital gains. Blend funds offer an amalgamation of what growth and value funds have to present to investors. Blend funds offer an alternative option for investors who are looking to diversify investments into growth and value assets. Also, blend funds are hugely diversified because they hold a large number of assets to cover both growth and value options.

Performance: Growth versus Value

  Index Returns (in % as of Sep 12th)
Benchmarks   1 Mo YTD 3Yrs 5Yrs
S&P 500 1.6 7.4 63.3 90.4
Dow Jones Industrial Average (DJI) 1.6 2.5 47.6 76.9
Large Cap Index Morningstar Large Cap Index (MLCP) 1.5 7.3 62.4 86.8
           
Growth Dow Jones U.S. Large-Cap Growth Index (DJUSGL) 1.8 8.1 61 97.5
Morningstar Large Growth Index (MLGR) 1.7 9.2 66.7 107.2
           
Value Dow Jones U.S. Large-Cap Value Index (DJUSVL) 1.4 6.8 61 77
Morningstar Large Value Index (MLVL) 1 5.4 52.1 64.6
 
The chart here clearly shows that the growth funds have outperformed value funds for all the periods mentioned. Over the long term, i.e., in the last five years, gains in the Dow Jones U.S. Large-Cap Growth Index and Morningstar Large Growth Index of 97.5% and 107.2% have significantly outpaced the Dow Jones U.S. Large-Cap Value Index’ and Morningstar Large Value Index’ gains of 77% and 64.6%. Also, the growth funds have in almost all occasions outperformed the broader indices – S&P 500 and the Dow.

3 Funds to Buy

We will suggest here the top large-cap funds from each category.

These funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

The funds are among the top gainers this year so far. They also carry no sales load and have low expense ratio.
Large-Cap Growth

ClearBridge Aggressive Growth IS (LSIFX - MF report) seeks growth of capital by investing in prominent companies with long-term earnings growth potential. It invests mostly in large-cap companies that are expected to post or are already witnessing earnings growth higher than companies listed in the S&P 500 Index.

The fund has returned 14.4% so far this year and also boasts 28.6% and 21.4% annualized returns over the last three and five years. The fund carries no sales load and has an expense ratio of 0.73% as compared to category average of 1.2%.

Large-Cap Value

Payden Equity Income (PYVLX - MF report) invests most of its assets in large-cap value stocks that have high dividend yields. The fund also invests in other income producing equity securities that may include exchange-traded common stocks and REITs. The fund mostly invests in domestic securities. A maximum of 30% of its assets may be invested in non-US securities.

The fund has returned 12.2% so far this year and also boasts 19.1% and 15.5% annualized returns over the last three and five years. The fund carries no sales load and has an expense ratio of 0.8% as compared to category average of 1.13%.

Large-Cap Blend

Wells Fargo Advantage Large Cap Core Institutional (EGOIX - MF report) seeks capital growth over the long term. The fund invests most of its assets in large-cap companies. These companies have market capitalization within the market cap range of S&P 500 Index. A maximum of 10% of its assets may be invested in foreign securities, including ADRs.

The fund has returned 11.6% so far this year and also boasts 26.1% and 16.8% annualized returns over the last three and five years. The fund carries no sales load and has an expense ratio of 0.66% as compared to category average of 1.08%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our Mutual Fund Center.

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