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QUARTERLY INVESTMENT OUTLOOK AND FUND REVIEW

As Big Caps Stumble, a Few Still Walk Tall

Despite a disappointing performance this year for large stocks overall, some funds are faring well.

October 09, 2000|JOSH FRIEDMAN | TIMES STAFF WRITER

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.

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