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Mutual Funds

Riding the Big Stocks

If this is, in fact, the start of a long move up by large companies, don't miss out.

It's been so long in happening that it reads like a misprint. But finally, large companies are whupping small companies in the stock market -- something that hasn't happened since 1999. This may be the beginning of a long run for funds that invest in large companies, as more investors take notice of their relatively attractive valuations. (Lest you think I'm the Nostradamus of mutual funds, I've been saying this for three years and have only recently been right -- just as I was premature in the late 1990s when I said that small-company funds were about to have their day in the sun.)

I also like the defensive nature of large companies these days because they're stable and, on the whole, less risky than small companies. That's nice to know because it looks as if we're in for a wild ride the next couple of years, with high oil prices, Federal Reserve interest-rate cuts and an economy weakened by the housing bust.

If this is, in fact, the start of a long move up by large companies, don't miss out -- as some investors did in 2000, when small companies began their long rally. If you invest based on recent returns, or even if you just let your winners ride without rebalancing your portfolio, you may well be entering 2008 with a portfolio heavily skewed toward small caps.

If so, I've got three funds for you. Each one loves mega-cap stocks and looks primed for a nice run over the next five to ten years.


Tom Marsico says that mega-cap stocks are underfollowed and that the market is less efficient than people think. I'm a little skeptical about that argument, but in Marsico Focus fund (symbol MFOCX) he has shown a knack for finding long-term winners among the giants.

His outstanding 20-year record at the Janus and then Marsico funds reflects his ability to blend macroeconomic themes with savvy stock picking. In 2007, Marsico worked on his seventh straight year of above-average returns compared with the pack of large-growth funds, thanks to such smart stock picks as Schlumberger, Apple and Monsanto.

The portfolio turnover rate of Dreyfus Appreciation (DGAGX) is a mere 1% annually. Favoring well-established brand names over faster growers, it owns the likes of Nestlé, Procter & Gamble, ExxonMobil and Coca-Cola. You may be thinking, Dreyfus? Its stock funds would have to improve just to be mediocre!

Maybe, but this particular fund is managed by Fayez Sarofim & Co., of Houston. The firm has a great track record at this fund and the firm's larger institutional accounts. I like Sarofim's stability -- not a lot of changes in managers and analysts. An investment committee composed of Fayez Sarofim, Charles Sheedy, Christopher Sarofim and several others with decades of experience makes portfolio decisions. Together, they keep the fund tightly focused on companies with valuable brands, high-quality earnings, clean balance sheets and lots of free cash flow.


For a pure play on mega caps, go with Bridgeway Blue Chip 35 Index (BRLIX). This fund owns just 35 of the largest stocks in the U.S., giving its holdings an enormous average market capitalization of $135 billion. I like the simplicity and the low costs. If your portfolio is listing toward small caps, just putting 5% or 10% in this fund will give it a big booster shot of mega caps. In addition, its expense ratio is just 0.15% -- a price that's tough to beat.

Cheap choices. You can also invest in exchange-traded funds to gain exposure to a mega-cap index. Consider Diamonds (DIA), with an average market cap of $117 billion and an expense ratio of 0.17%. There's also iShares S&P 500 Growth (IVW) -- market cap: $63 billion; expense ratio: 0.18% -- and Vanguard Dividend Appreciation ETF (VIG) -- market cap: $56 billion; expense ratio: 0.27%.

Columnist Russel Kinnel is director of mutual fund research for Morningstar and editor of its monthly FundInvestor newsletter.