The Return of American Century Legacy Large Cap

From the mid 1970s through the 1990s, American Century was one of the nation’s top growth-stock managers. Led by its Growth, Select and Ultra funds, the firm, once called 20th Century, pioneered a form of investing that highlighted firms with accelerating earnings and rising share prices. But the funds crashed when the tech bubble burst in 2000. Managers subsequently toned down the funds’ aggressiveness, but performance has been nondescript over the past decade, and investors withdrew billions.

But American Century is shining again with two funds launched in 2006. American Century Legacy Large Cap (symbol ACGOX) and American Century Legacy Focused Large Cap (ACFOX) use a proprietary mathematical model that steers managers John Small and Stephen Pool toward the stock market’s most-promising companies.

More specifically, the model uses 18 criteria to rank 1,200 large-company stocks according to the highest probability for share-price appreciation. Among the things the model considers are the change in earnings and sales growth from quarter to quarter and a stock’s price-earnings ratio. Beginning last year, the model also began incorporating economic and stock-market factors.

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After the computers do their thing, the managers run a second screen to rank the stocks for risk and make sure the funds’ sector weightings are in line with those of their benchmarks. The funds re-rank and rebalance their holdings weekly, replacing weaker stocks with those that have higher rankings. “That’s been helpful over the past year, when the market changed its mind on the turn of a dime,” says John Small Jr., one of the managers. Over the past year through February 24, Legacy Large Cap returned 11.5%, and Focused Large Cap earned 9.1%, compared with a 6.8% gain for Standard & Poor’s 500-stock index.

Based on December 31 holdings, the computers late last year were steering the funds toward more-conservative companies that could hold up in a weak economy. Among the funds’ biggest holdings were AutoZone, the auto-parts retailer (business tends to improve when people hold on to their cars longer); oil-giant Chevron; International Business Machines; and Philip Morris International. The main difference between the funds is the number of stocks they hold. As its name suggests, Focused is more concentrated. It typically holds 30 to 33 stocks, while Legacy Large Cap owns 50 to 55 names.

Thanks to their solid performance over the past year, both funds are now ahead of the S&P 500 index and the average large-company-growth fund over the past five years. But their longer-term records have been choppy. After they beat the market in 2007, both lagged the index in each of the next three years.

The funds may have gotten their swagger back over the past year, but one year doesn’t make a trend. We’ll have to see a few more years of market-beating returns before we can safely declare that this is American Century’s century.

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