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Mutual Funds

The Best of the Big Funds

The 20 biggest no-load stock funds -- should you buy, sell or hold?

In the mutual fund arena, it's hard to claim that bigger is better. Too many funds lose a bit of flexibility and agility as they put on weight. Yet tens of millions of Americans have part of their wealth tied up in these heavyweights, and money continues to pour into them.

So we thought it was time to take a hard look at the 20 biggest no-load stock funds to separate the true champs from the tired also-rans. We include balanced funds, index funds and funds that have closed their doors to new investors, because even shuttered funds are open to existing customers (but we excluded one index fund that required a $100,000 initial investment).

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As you'll see, some of the behemoths have managed their weight gain gracefully. Others have simply become bloated and seemingly lost their way. But there are no truly awful funds among the 20 biggest; we suggest selling only one of them. We divide the funds into four groups and list them, within each category, by size.

Domestic funds

Weighing in at a hefty $69 billion, Fidelity Contrafund is the biggest actively managed no-load fund. In charge is Will Danoff, a feisty, opinionated manager who invests wherever he sees fit. Since he took over in 1990, Contra has gained 16% annualized, beating Standard Poor's 500-stock index by an average of four percentage points per year.

Despite its name, Contra, which is closed to new clients, does not focus on out-of-favor stocks. Rather, Danoff buys growth stocks that he thinks others are underestimating. Recently, his biggest positions included Apple Computer and Google -- hardly laggards. The fund had 24% of its assets in foreign stocks. Danoff has a great record, but given his fund's immensity, we advise investors to HOLD their positions but not add to them.

If you already have a position in Dodge Cox Stock, consider yourself lucky. The fund, which is closed to new investors, is a marvel of consistency. Over the past 20 years, it has ranked among the top 50% of large-company value funds 17 times. Its 15% annualized return tops the category average by four percentage points a year. Yearly fees, at 0.52%, are exceedingly low for an actively managed fund.

DC Stock is a triumph of discipline and process -- and of management by committee (see "The Dodge Cox Mystique," Nov.). In-house security analysts generate stock ideas after studying company candidates for months. They write detailed reports and make oral presentations that are reviewed by an investment-policy committee of nine. Once the fund buys, it sticks with its holdings for an average of seven years. Assets, now topping $61 billion, bear watching, but Dodge Cox's low-turnover style mitigates some of the problems of size. If you're already a shareholder, BUY more.

It's not hard to see why Vanguard Windsor II is Vanguard's largest actively managed fund. James Barrow, a crusty Texan from Barrow, Hanley, Mewhinney Strauss, in Dallas, has been at the helm of this large-company value fund since its launch in 1985. "I've run it the same way for 20 years," says Barrow, who manages about 60% of the fund's assets (five other advisers run the rest). During that span, Windsor II returned 12% annualized, placing it in the top 20% of its category. The fund's annual expenses, at 0.35%, don't get much lower.

Barrow looks for stocks that sell at cheaper prices than the market on various measures and that offer a higher yield. Once he adds a stock, he tends to hold for four to five years, on average. He's kept Altria, the former Philip Morris, for 20 years. "If you have a value manager with 100% turnover, he's a trader, not a value manager," says Barrow. Windsor II remains a BUY.

No fund once received more accolades than Fidelity Magellan -- or more brickbats. As the fund's fame grew, so did its girth, with assets hitting $100 billion in 2000. Magellan then stumbled, trailing the market four years out of five between 2000 and 2004. Now, its fate falls on the shoulders of Harry Lange, who came aboard in October 2005 after a stellar nine-year stint at Fidelity Capital Appreciation. Lange favors companies in growing industries, including health care and technology. "Almost all the bets I make are in riskier companies," says Lange, who at last report had 28% of Magellan's assets in foreign stocks.

So far, many of Lange's bets haven't panned out. Over the past 12 months to December 1, Magellan's 10% return trailed that of the SP 500 by four percentage points. Still, given Lange's fine earlier record, the closed fund's slimmer size, a low expense ratio (0.59%) and brighter prospects for big-company growth stocks after seven years of sub-par results, we advise shareholders to BUY Magellan.

With little fanfare, Joel Tillinghast has compiled one of the best records in the business. During his 17-year reign as manager, Fidelity Low-Priced Stock has returned a staggering 17% annualized. That beats the SP 500 by seven percentage points a year, on average, and the small-company Russell 2000 by six points a year.

As the name indicates, the fund, which is closed to new investors, invests primarily in low-priced stocks. Nowadays, that's defined as stocks that sell for less than $35. Shares of small and midsize companies still predominate, but as the fund has grown to gargantuan proportions, the value-conscious Tillinghast has had to own more names and invest in bigger companies. The sprawling, $39-billion portfolio contains 840 holdings, including such giants as Pfizer and Oracle. We're not dissing Tillinghast, but given the fund's mission and its heft, we rate Low-Priced Stock a HOLD.

If you're fortunate enough to hold Vanguard Primecap, which has been closed to new investors for nearly three years, feel free to BUY more shares. Steered by Primecap Management Co., of Pasadena, Cal., since its inception in 1984, this large-company growth fund has returned 14% annualized over the past 20 years, beating its average peer by four percentage points per year. And in the past 15 years, Primecap has been in the top 40% of its category 13 times. Annual expenses of 0.46% are a bargain.

The fund's managers search for reasonably priced, growing companies with strong positions in their industries and high barriers to entry. The average holding period for a stock is five years. Shares of Adobe Systems, Federal Express and Medtronic have graced the fund for more than a decade; recent additions include Novartis and Roche.

In Tim Cohen's world, bad news is often good news. "I like to look for bad news in the newspapers and on Wall Street for potential ideas," says Cohen, who took over Fidelity Growth Income in October 2005 after four solid years at Fidelity Export Multinational. One of Growth Income's top holdings is Home Depot, which Cohen thinks investors have beaten down below its true value.

Cohen is a buy-and-hold investor who favors companies that pay dividends and generate plenty of free cash flow. Beyond that, he invests wherever he finds the best opportunities. At present, that includes many blue-chip growth companies, such as eBay and Google. Cohen is one of Fidelity's rising stars, but we'd prefer to see a longer record at Growth Income before endorsing the fund. Current investors should HOLD it.

You don't have to be little to invest aggressively, as Fidelity Growth Company shows. Steve Wymer, manager of the $30-billion fund since 1997, focuses mostly on fast-growing technology and health-care stocks. The fund, which closed to new clients in April 2006, invests in companies with rapid revenue growth and stock-market values of more than $1 billion. "The theory is that when revenue is growing, potential is there," says Wymer. "But I don't chase growth for growth's sake. I invest in good businesses that will be profitable in the long term."

With Wymer behind the wheel, Growth Company has delivered solid results over the long term. Over the past decade, the fund's 9% annualized return beat the results of 96% of funds that focus on large, fast-growing companies. But Growth Company can take shareholders on a bumpy ride. It has been 20% more volatile than its rivals and plunged 69% during the 2000Ð02 bear market. Still, given Wymer's fine record versus his peers and our positive view on large-company growth stocks, we believe shareholders can continue to BUY Growth Company.

When it comes to managing money on an elephantine scale, Stephen Petersen is a whiz. Between Fidelity Equity-Income and his other charge, Fidelity Puritan (see page 41), Petersen manages more than $54 billion. For the past 13 years, Petersen has generated steady returns at Equity-Income using a simple formula. He seeks undervalued stocks with dividend yields greater than that of the SP 500. Not surprisingly, the fund is filled with big, well-known companies. Top holdings recently included ExxonMobil and Bank of America. Turnover is low; on average, Petersen holds stocks for five years.

Although not eye-popping, Equity-Income's long-term record is sound. Under Petersen's watch, it returned 11% annualized, slightly ahead of the SP 500. It has lost money in only two of those years (2001 and 2002) and has topped the index each year since 2000. Investors looking for a low-key, value-oriented fund should BUY Fidelity Equity-Income.

For sheer continuity of management, it's hard to beat T. Rowe Price Equity Income. Brian Rogers has skippered the fund since its launch in 1985. Much like Fidelity Equity-Income, it focuses on large, dividend-paying companies. Since its inception, Equity Income has returned an impressive 13% annualized.

Rogers looks for companies, often out of favor, with relatively low price-earnings ratios and high yields. "Undervaluation and dividend focus keep you out of trouble in difficult market environments," he says, explaining why his fund held up so well in the disastrous 2000Ð02 market, during which it lost just 9%. Recent additions to the fund include Eli Lilly and HR Block. T. Rowe Price Equity Income, a member of the Kiplinger 25, is a BUY.

The prospects for blue-chip stocks are bright, but the outlook for Fidelity Blue Chip Growth is hazy. The fund, which invests in large, fast-growing companies, has ranked among the bottom 30% of its peers in each of the past four years. Over the past decade, it gained 5% annualized, matching the average large-company growth fund but lagging the SP 500 by nearly three percentage points a year.

And now the fund has a new manager, Jennifer Uhrig, who took over in November. She previously ran Fidelity Advisor Equity Growth, a load fund with a mission similar to that of Blue Chip Growth. During her nine-year stint, Equity Growth performed roughly in line with its peers. We don't find any compelling reasons to stick with Blue Chip and urge holders to SELL.


Index funds

With SP 500 index funds, it's all about the stock market -- in particular, the market for the largest U.S. companies. As large-capitalization U.S. stocks go, so will Vanguard 500 Index. With index funds, only three things matter: which index the fund tracks, how well the fund tracks the index and how much the fund charges. Annual fees of 0.18% are near rock bottom, and Vanguard has done well at hugging the index. Over the past 20 years, Vanguard 500, the granddaddy of all index funds and the nation's biggest no-load fund, has trailed its benchmark by just 0.08 percentage point per year, on average. Because we're bullish on large-company stocks and because most big-company funds lag the SP 500, Vanguard 500 is a BUY.

These days, Vanguard Total Stock Market Index is growing faster than its SP 500 cousin. Providing low-cost exposure to the total market -- large, midsize and small companies -- this broadly diversified fund tracks the MSCI US Broad Market Index of 3,900 stocks. Although large-company stocks make up 73% of that index, stick with Vanguard 500 if you want to make a bet on the big guys; if you already own Total Stock Market, HOLD it.

In theory, actively managed overseas funds stand a better chance of besting international index funds because foreign markets tend to be less efficient than ours, making it easier for managers to shine. In practice, however, Vanguard Total International Stock Index has more than held its own against actively managed funds. Total International, which invests in three Vanguard regional index funds, got off to a sluggish start, but it has now outpaced the average diversified foreign fund for six straight years. A low expense ratio of 0.31% helps. BUY this fund for no-fuss exposure to foreign stock markets.

Overseas funds

Since its birth in 2001, Dodge Cox International Stock has grown up quickly. It's easy to see why. Annualized returns of 20% over the past five years comfortably land International in the top 10% of diversified foreign stock funds.

Another triumph of the Dodge Cox way, International is run on the same principles as its domestic sibling. In fact, the same analysts initiate investment ideas, and four members of the committee that runs International are also on the panel in charge of Stock. If you need to increase your allocation to foreign stocks, BUY this fund while it's still open.

Is bloat catching up with Fidelity Diversified International? Since shutting to new clients in October 2004, assets have ballooned from $18 billion to $46 billion. But after outpacing the average diversified overseas fund for 13 straight years, Diversified International lagged its average rival by two percentage points in the first 11 months of 2006.

Manager Bill Bower says asset growth isn't responsible for the lackluster '06. Instead, he blames the sluggish performance on his decision to cut back -- prematurely, as it turned out -- on his holdings of emerging-markets stocks. Bower spreads his portfolio across more than 350 stocks -- mostly large companies in developed countries. He doesn't make big-picture judgments on countries or their sectors. "Instead of making industry or geographic bets, I want to own the best stock in a given industry in every part of the world," says Bower, who has led the fund since 2001. The fund's size and performance slowdown are worrisome. We rate the fund a HOLD for current clients.


Balanced funds

Talk about venerability. Vanguard Wellington, the oldest and largest balanced fund, has been around since 1929. Manager Edward Bousa says Wellington, which keeps about 65% of assets in stocks (most of them dividend payers), and the rest in bonds and cash, suits "people who want to buy and hold a fund forever. Consistency is the hallmark." This fund has returned 9% annualized over the past decade, outpacing the typical balanced fund by an average of three percentage points per year. Balanced funds as a matter of policy hold both stocks and bonds.

Bousa studies global supply-and-demand imbalances in industries when picking stocks (John Keogh runs the bond allocation). For example, robust demand for oil by China and India pointed him in the direction of such stocks as ExxonMobil and ConocoPhillips. Today, strong demand for farm products leads him to Deere and Syngenta, a Swiss seed-technology outfit. Wellington yields 2.9% and is a BUY for investors seeking a fund with a third of its assets devoted to bonds.

Borrowing liberally from its siblings, Dodge Cox Balanced invests in stocks that are held by Dodge Cox Stock, and managers borrow bond ideas from Dodge Cox Income, a bond fund. Balanced, which is closed, has returned 12% annualized over the past 20 years and lost money in only one of those years (down 3% in 2002).

Unlike most money managers, the same in-house research analysts, divided up by industry, analyze both stocks and fixed-income investments. In fact, there's considerable overlap between the corporate bond and stock names in Balanced. "If we have a very positive outlook for the long-term growth and success of a company, it makes us interested in buying the bond," says Charles Pohl, co-director of research. If you currently hold Balanced and are comfortable with the allocation, feel free to BUY more.

Call Fidelity Puritan Equity-Income lite. The 60% or so of Puritan's assets in stocks, mostly blue chips with above-average yields, are virtually identical to those in Fidelity Equity-Income. That shouldn't come as a surprise because Stephen Petersen, Equity-Income's manager, runs Puritan's stock portfolio (George Fischer runs the fund's bond portion).

Puritan has outpaced the average balanced fund in nine of the past 11 years, although it has lagged Dodge Cox Balanced, Vanguard Wellington and Fidelity Balanced over the long term. That might be because of a slightly lower allocation to stocks than its big rivals. Still, its focus on large companies means Puritan should thrive when those kinds of stocks rebound. Investors who like by-the-book balanced funds may BUY more shares.

Lawrence Rakers says Fidelity Balanced is a fund for "hungry widows and orphans." By that, he means Balanced is a bit more aggressive than many of its peers. Its allocation to stocks is sometimes as high as 70%, and he's more willing than the typical balanced-fund manager to invest in small and midsize companies. As a result, Balanced has been in the top 10% of its category over the past five years but has also been 28% more volatile than the typical balanced fund.Rakers, who chooses the stocks and sets the fund's overall allocation (while George Fischer, once again, selects the bonds), freely credits the Fidelity machine for his success. "My whole process is to extract value from Fidelity research," says Rakers. Each day he scans an internal newspaper that contains one-page company reports compiled by the 90 stock analysts in Fidelity's Boston headquarters. BUY Balanced if you want a fund with a mix of stocks and bonds and you're willing to accept a slightly higher level of risk than that of the typical balanced fund.

Key numbers: The scoop on the 20 largest no-load stock funds

Most funds on this list have solid records. Of the 15 actively managed U.S. stock and balanced funds, only three trailed the SP 500 over the past ten years. The only fund we suggest selling is Fidelity Blue Chip Growth.

FUND SYMBOL ASSETS (IN BILLIONS)* 1 YR RETURN 5-YR ANNUALIZED RETURN 10-YR ANNUALIZED RETURN EXPENSE RATIO
Vanguard 500 Index Inv VFINX $115.7 14.1% 6.0% 8.0% 0.18%
Vanguard Total Stock Market Index Inv VTSMX 81.0 14.4 7.6 8.3 0.19
Fidelity Contrafund** FCNTX 68.8 13.0 12.0 10.9 0.90
Dodge & Cox Stock** DODGX 61.0 17.9 13.0 13.8 0.52
Vanguard Windsor II Inv VWNFX 46.7 15.8 10.1 9.8 0.35
Fidelity Magellan** FMAGX 46.0 9.9 3.5 6.8 0.59
Fidelity Diversified International** FDIVX 45.8 25.7 17.0 12.9 1.06
Vangaurd Wellington Inv VWELX 44.3 14.7 8.9 9.4 0.29
Fidelity Low-Priced Stock** FLPSX 38.8 17.7 16.4 15.5 0.88
Vanguard Primecap Inv** VPMCX 31.1 15.1 9.0 12.6 0.46
Fidelity Growth & Income FGRIX 30.5 10.1 4.1 7.0 0.69
Fidelity Growth Company** FDGRX 30.1 11.6 5.7 9.2 0.97
Fidelity Equity-Income FEQIX 29.9 18.0 8.7 9.0 0.68
Dodge & Cox Balanced** DODBX 26.0 13.7 10.7 11.5 0.53
Fidelity Puritan FPURX 25.5 14.0 8.0 8.4 0.63
Dodge & Cox International Stock DODFX 24.6 28.2 20.5 - 0.67
T. Rowe Price Equity-Income PRFDX 22.7 16.9 9.3 9.9 0.71
Fidelity Balanced FBALX 22.2 13.5 10.3 10.7 0.64
Fidelity Blue Chip Growth FBGRX 20.4 5.5 1.7 5.3 0.63
Vanguard Total Intl Stock Index VGTSX 18.2 29.2 15.7 7.3 0.31
SP 500-STOCK INDEX 14.2% 6.1% 8.1%
MSCI EAFE INDEX 27.6% 14.8% 7.6%

Data to December 1. *Includes all share classes. **Closed to new investors. -Not applicable. Source: Standard & Poor's.