October 12, 2011 - Revenge of the Large-Cap Stock Dividend Payers - by Morningstar Investment Research
Over the past few years, beating the S&P 500 has been a lay-up for many actively managed funds. Small caps, mid-caps, and even smaller large caps had, until recently, outperformed, so active funds had only to underweight the giant caps that dominate the index in order to edge past it.
The tables have turned so far in 2011, however. Owing to fears of an economic slowdown, small- and mid-cap stocks have tumbled, whereas large caps and mega-caps have held up relatively better. And all of a sudden, beating the index doesn't look all that simple. Through the end of September, the average actively managed large-blend fund in our database had lost about 11% for the year to date, whereas S&P 500 Index funds had lost two percentage points less. Most active funds de-emphasize the index's biggest constituents, and many hold hard-hit foreign stocks, likely explaining at least part of the shortfall. (Coincidentally, active bond funds have also had a rough go of it for the past several months, as Morningstar's Eric Jacobson discussed in this article.)
To help identify large-cap blend funds that have managed to beat the S&P 500 for the year to date, we turned to our Premium Fund Screener. We started by screening on non-index large-cap blend funds that had delivered better numbers than the S&P 500's 3.5% year-to-date loss through Sept. 10. To help identify short-term outperformers that appear to be a good bet on a forward-looking basis, too, we layered on screens for below-average costs and reasonably long manager tenures (five years or better).
The resultant list showcases what types of stocks have held up best thus far in 2011's volatile market: Nearly all of the funds that made it through our screen emphasize mega-caps, dividend payers, or both. Four of the nine funds on the list have "Income" or "Dividend" in their names. Meanwhile, funds like Ameristock (AMSTX) and AMF Large-Cap Equity (MUTF:IICAX) have high dividend yields relative to their large-blend peers.
Here are a few of the most compelling offerings in the screen's output. (Perennial favorites Sequoia (MUTF:SEQUX) and Vanguard Dividend Growth (MUTF:VDIGX) also made it through out screening hurdles.) Premium users can click here to view the screen and its output.
BBH Core Select (MUTF:BBTEX)
This valuation-conscious fund's recent emphasis on companies with steady growth characteristics has put it in the sweet spot of recent market action. With big overweightings in consumer-defensive and health-care stocks, the fund has benefited from investors' appetite for companies that will continue to crank out earnings regardless of the economic climate. Meanwhile, the managers have downplayed hard-hit cyclical and energy names relative to the fund's peer group. The fund has more to show for itself than its recently strong performance: With a longtime emphasis on high-quality names trading at reasonable valuations, it has a history of holding up well when stocks are trending down. Its 2008 loss was among the smallest in the large-blend group.
Parnassus Equity Income (MUTF:PRBLX)
This socially conscious offering's passel of dividend payers--which skittish investors have recently gravitated toward--has held it in good stead lately. Like the BBH managers, Parnassus' Todd Ahlsten favors companies with strong brand names that are selling at reasonable valuations, and stocks like Procter & Gamble (NYSE:PG) and CVS Caremark (NYSE:CVS) have handily outperformed more cyclical names thus far this year. Ahlsten also has a solid record of protecting shareholders' capital on the downside: The fund's upside/downside capture ratio statistics show that it has historically gained slightly less than the S&P 500 in up markets but has more than made up that ground during downturns.
T. Rowe Price Dividend Growth (MUTF:PRDGX)
Although its dividend isn't as robust as Vanguard Dividend Growth's, this offering deserves a seat at the table with other top dividend-focused funds. An emphasis on companies with a history of growing their dividends--and not just stocks whose dividend yields are currently high--helps it avoid value traps. Manager Tom Huber further ensures quality by focusing on firms with solid management and growth prospects. For the year to date, picks like Pfizer (NYSE:PFE), Accenture (NYSE:ACN), and ExxonMobil (NYSE:XOM) have held it in good stead, and performance over the whole of Huber's tenure has also been impressive.