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2001 BW 50

SPRING 2002

MUTUAL FUND MAVEN

Getting Back into Growth Funds
They took a beating over the past two years, but should bounce back big as the economy recovers


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Mutual-fund investors who came to love growth funds during the raging bull market of the 1990s learned to hate them in 2000 and 2001. Since the tech bubble burst in March, 2000, funds that invest in the stocks of fast-growing companies have performed abysmally. At the same time, funds that use a "value" approach -- buying cheap stocks of companies in slower, steadier industries -- have done relatively well. That doesn't mean most value funds have shot the lights out. But their results have been a heck of a lot better than those of the growth funds.

Now, with an economic rebound newly under way, investors should consider overcoming their distaste for growth funds and adding them to their portfolios once again. Value funds have dramatically outperformed in the last two years, but chances are that's going to change in the next year or so.

LESS TAXING.  "If anyone has completely dumped all their growth funds, they should definitely take another look at getting back in," says Russel Kinnel, director of fund analysis at Morningstar. Even though he says growth and value investing styles do about the same over the long haul, "there are periods when growth will do much better, and you don't want to miss out." That's especially true if you're close to retirement and can't afford to take the long-term approach usually associated with value investing.

There are other reasons why adding a growth fund back into the mix now might be a good idea. Because of their steep losses, a lot of growth funds aren't carrying so much exposure to capital-gains taxes, so "you're not going to get stuck with someone else's tax bill" at the end of the year when funds need to pay taxes on portfolio gains, says Kinnel. Plus, while a lot of the top-performing growth funds closed in the late '90s, some have since opened up again to new investors now that they're much smaller in size, he notes.

Rather than diving into a supercharged fund, investors should look for growth funds that have held up relatively well even while value investing has been in favor. To help out, we've compiled a list of growth funds that have earned BusinessWeek's A rating because they have top returns over the past five years with less volatility. They've also turned in better results than their peers in the past year.

The funds listed below may not achieve spectacular results if the bull market returns, but all are solid long-term performers, which allows for a safer way to get back into growth.

Small-Cap Funds:

FMI Focus (FMIOX ). Morningstar calls this no-load, "one of the best of the bunch." It has returned an average of 33% a year for the past five years and is up 5% this year through the end of February.


Wasatch Small-Cap Growth (WAAEX ). The Wasatch family has a number of funds that have been on a tear this year, including this one. It's up 18% in the past year and 20% a year in the past five.

Hennessey Cornerstone Growth (HFCGX ). This no-load fund scored well in the past year -- up 16%. Its five-year returns also shine: up 19% on average.

Mid-Cap Funds:

Fidelity Mid-Cap (FMCSX ). A solid choice, with 17% five-year average annual returns, even though it has lost 12% in the past year. Morningstar notes that it really does stick to midsize companies, unlike many so-called mid-cap funds that venture into large-cap stocks to boost their returns.

Vanguard Primecap (VPMCX ). Managers stay away from overpriced stocks, giving this no-load a steady 15% five-year average annual return. It has lost just 7% in the past year.

Vanguard Capital Opportunity (VHCOX ). A little more volatile than its sister Primecap, this fund has a 20% five-year annual return but is down 11% in the past year.

Large-Cap Funds:

The Jensen Fund (JENSX ). One of the only names in the large-cap growth category that is up this year. The no-load has a 7% one-year return and a 14.5% five-year average annual return (see BW Online, 1/15/02, "Jensen Fund: The Importance of Being Picky").

Growth Fund of America (AGTHX ). It has a steep 5.75% sales load on the A shares but low annual expenses. Even with its 12% decline in the past year, its 15% five-year return makes it stand out among its large-cap peers.

Smith Barney Aggressive Growth (SHRAX ). The fund has low turnover and a five-year average annual return of 17%. But it lost 13% in the past year.

Stone is an associate editor of BusinessWeek Online and covers the markets as a Street Wise columnist and mutual funds in her Mutual Funds Maven column


MARCH 25, 2002



By Amey Stone

Edited by Beth Belton

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