As Big Caps Stumble, a Few Still Walk Tall

Thinking big isn’t paying off like it used to.

Returns on large-capitalization stocks overall have been disappointing this year compared with many other market sectors. That brings to an end the dominance of blue-chip shares that marked most of the late 1990s.

The average large-cap growth fund lost 0.2% in the third quarter and was up just 2.8% for the first nine months. The average large-cap value fund fared better, gaining 4.9% in the quarter, though the nine-month return was 3%.

The average large-cap fund still is beating the Standard & Poor’s 500 index this year, but that isn’t saying much.

Wall Street strategists say there are many reasons for big stocks’ woes this year, including the spring pullback of major technology issues from sky-high valuations.

Still, long term, many pros caution against becoming too bearish about blue chips.

Philip Orlando, chief investment officer at Value Line Asset Management in New York, notes that some of the factors contributing to big-cap stocks’ weakness aren’t likely to be permanent--for example, the sagging euro currency, which has depressed U.S. multinationals’ earnings.

Orlando allows that small- and mid-cap stocks, which have shone this year, may lead the market for a while. But long-term investors in blue chips shouldn’t push any panic buttons, he said.

Big companies got that way for a reason, after all: They have been vastly more successful than their smaller rivals. Returns on the stocks may simply be coming back to Earth after the tremendous run of the last few years.

“Even if I’m right and we have a broader [bull] market from here, the major stocks are still likely to return 8% to 12% annually over the long haul, and that ain’t bad,” he said.

Richard Bernstein, head of quantitative research at Merrill Lynch, said the S&P; 500’s setback is “not a large-cap/small-cap issue so much as a tech/non-tech issue.” He noted that the index remains heavily weighted in tech and telecom.

While those stocks have fallen, many old-economy stocks in such fields as utilities, energy and drugs have rallied, Bernstein said.

How long before the S&P; 500 itself regains momentum? If the 1980s and ‘90s are viewed in five-year chunks, small stocks and big stocks took consecutive turns beating each other, according to data from Frank Russell Co.

As Orlando put it: “The market can be a bit like that biblical idea of seven fat years followed by seven lean years.”

But even if big-cap stocks are entering lean years, some big-cap stock funds are likely to beat the averages.

In the accompanying chart, The Times, using Morningstar data, identifies 29 big-cap funds that are outshining the S&P; 500 this year.

What’s more, to make the chart, the funds had to beat the S&P; over the last one, three and five years.

To get the final cut, we removed funds that charge upfront sales fees, have higher-than-average portfolio turnover (which can generate hefty capital gains taxes for shareholders) and higher-than-average expense ratios.

Of the 29 funds, 28 are classified by Morningstar as either large-growth or “blend” (a mix of growth and value stocks) in their styles. That reflects the growth sector’s dominance in recent years, though value stocks are faring better this year.

As always, past performance guarantees nothing about future results. Investors should do their own research before making decisions about funds on this list.

That said, here’s a look at some of the funds that made the cut:

* Ameristock is the only fund on the list that Morningstar categorizes as large-value in its investment style. The $96-million fund, managed by Nicholas D. Gerber, looks only at stocks with market capitalizations of $15 billion or more, whereas some of its big-cap peers will dip down much lower when stock-prospecting.

Reflecting his value stance, Gerber’s holdings may be unglamorous--at midyear, the fund was headed by such names as Washington Mutual, Sara Lee, Sears Roebuck and Fannie Mae--but it’s hard to argue with his record. The fund’s five-year return beats 98% of its large-value peers.

* Alleghany/Chicago Trust Growth & Income veers from many of its competitors by dabbling in mid-cap stocks, Morningstar notes. A shake-up last fall, when the $535-million fund’s two managers bailed in a wave of defections from Chicago Trust, is a concern. But new managers Bernard Myszkowski, who took over in September 1999, and Richard S. Drake, who came aboard in February, are off to a solid start: The fund returned 24.3% in the 12 months ended Sept. 29.

Old-economy stocks such as Harley-Davidson, Cardinal Health, oil services provider Schlumberger and retailer Kohl’s have fueled returns this year.

* Manager Maureen E. Cullinane took over the $288-million Evergreen Aggressive Growth fund in April 1999 and her results have been strong so far. Hot holdings such as Nvidia, Check Point Software Technology, drug firm Alza and medical products firm MiniMed helped lead the fund to a 23.8% return through the third quarter. With a combined 67% of stock holdings in tech and health as of Aug. 31, Cullinane hasn’t shied away from heavy sector bets.

* The $36-billion Fidelity Growth Company fund has remained aggressive even as its assets have mushroomed: The fund has a hefty tech stock presence and a far smaller median market cap than its average peer.

But Morningstar’s analysts wonder whether the fund, managed by Steve Wymer, can stay nimble as its girth increases. So far it has: Growth Company gained 79.5% in 1999 and 12% in the first three quarters of this year.

* The $10-billion Janus Growth & Income fund “may look wimpy within its family, but it’s quite bold in the scheme of things,” according to Morningstar. The fund, which manager David Corkins took over in 1997 after star Tom Marsico left, has held up better than some of its flashier Janus siblings in 2000.

The fund tends to keep 5% to 10% of assets in bonds (as well as a similar chunk in cash), and Corkins is considered more value-conscious than some of his colleagues.

* The $172-million Sit Large-Cap Growth, managed since 1982 by Eugene Sit and Peter Mitchelson, has been one of the steadiest performers on the list, gaining 23% to 33% each year from 1995 through 1999--though this year has been tamer so far.

Manager Sit said discipline has been a key to success. “We’re buy-and-hold investors and we don’t get distracted--like chasing raw-materials [stocks] because they might be hot at the moment,” he said.

Sit uses a “top down/bottom up” approach, trying to identify broad economic trends and then find companies best poised to benefit from them. He’ll pay higher valuations for stocks, but not more than two times a company’s growth rate. So if a company’s earnings are expected to grow 25% a year over the next three to five years, Sit is willing to pay a price-to-earnings ratio of up to 50 for the stock.

Stocks he likes now include retailers such as Best Buy and RadioShack, oil and gas exploration firm Anadarko Petroleum, financial services firms such as Citigroup, and tech firms such as America Online, Computer Sciences and Ceridian.

* The $20-billion Vanguard U.S. Growth fund is mostly composed of stock behemoths: The median market cap of its holdings was recently $116 billion.

David Fowler, one of the fund’s three managers, said U.S. Growth has benefited from two strategic decisions: In health care, the fund has bet on big drug stocks rather than ultra-volatile biotech, and in technology, it has focused on Internet infrastructure plays. Its tech weighting is 55%, yet the fund has still thrived this year.

“We’ve been in a continuing shift for a while now from the PC world to the Internet world,” Fowler said, noting that the fund has lightened up on Intel, its top holding at midyear, and dumped Microsoft altogether. The research team at Vanguard’s sub-advisor for the fund, Lincoln Capital Management, has concentrated on Net infrastructure and data storage stocks such as Cisco Systems, Juniper Networks, EMC and Network Appliance, Fowler said.

* The $6-billion White Oak Growth Stock fund has rung up high returns with a concentrated portfolio in tech, financial and health-care companies. The fund’s performance has slipped lately just as manager James D. Oelschlager has become a media darling.

Still, the fund ended the first three quarters up 31%, tops in our screen. White Oak’s tax efficiency and low expense ratio are among its strengths, though Morningstar says its volatility may make it too aggressive as a core holding for some investors.

*

Times staff writer Josh Friedman can be reached at josh.friedman@latimes.com.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Persistent Performers

Among Large-Cap Funds

The Times screened Morningstar’s database for large-capitalization-stock mutual funds that have beaten the Standard & Poor’s 500 index not only year to date (YTD), through the third quarter, but also for the trailing three- and five-year periods. The screen filtered out funds with upfront sales charges, higher-than-average portfolio turnover and higher-than-average expense ratios. These 29 funds were left. They are ranked based on five-year annualized return.

*--*

--Total return-- (800) Fund YTD 3-yr. 5-yr. phone White Oak Growth Stock 31.0% 35.2% 36.3% 462-5386* Janus Growth & Income 0.2 27.5 29.1 525-8983 Fidelity Growth Company 12.0 35.1 29.0 544-8888 Whitehall Growth 17.9 29.8 28.4 994-2533 Gabelli Growth 0.8 25.1 27.9 422-3554 Transamerica Premier Equity 0.4 19.8 27.3 892-7587 Pacific Capital Growth Stock 10.1 27.3 26.4 258-9232 Janus 3.8 28.2 26.3 525-8983 Vanguard U.S. Growth 6.4 23.4 25.3 662-7447 Alleghany/Chicago Trust G&I; 7.6 23.0 24.7 992-8151 SSgA Growth & Income 5.7 21.0 24.5 647-7327 Evergreen Aggressive Growth 23.8 28.7 24.4 343-2898 OVB Capital Appreciation 4.4 26.5 24.4 545-6331 Sit Large Cap Growth 2.0 21.9 23.8 332-5580 Atlas Growth & Income 10.3 23.6 23.7 933-2852 Galaxy Equity Growth 7.4 20.3 23.4 628-0414 T. Rowe Price Blue Chip Growth 8.0 19.7 23.4 638-5660 Ameristock 13.3 17.4 23.2 394-5064 Fidelity Advisor Equity Growth 1.4 24.1 23.2 522-7297 Scudder Capital Growth AARP 1.2 18.3 23.2 322-2282 Stein Roe Young Investor 2.9 18.3 23.2 338-2550 Westcore Growth & Income 11.7 20.2 23.2 392-2673 Value Line Leveraged Growth 0.9 21.3 22.8 223-0818 Northern Growth Equity 6.4 21.2 22.7 595-9111 Pacific Capital Growth&Income; 5.6 19.5 22.7 258-9232 Armada Equity Growth 1 1.1 17.8 22.6 622-3863 T. Rowe Price Growth 9.3 20.5 22.5 638-5660 State Street Research Invest. 7.4 18.2 22.4 882-0052 Vanguard Morgan Growth 1.4 18.3 22.3 662-7447 S&P; 500 index -1.4 16.4 21.7

*--*

* Use toll-free area code 888

Note: Three- and five-year returns are annualized

Source: Morningstar Inc.