By Ben Baden

Large-cap blend funds were among the most unloved categories in 2010

Last year's three least popular stock fund categories among investors were large-growth, large-blend, and large-value. Large-growth funds saw the most outflows, followed by large-blend and large-value, according to Morningstar. That means the three categories could be poised for strong gains in the next few years, experts say.

Each year, Morningstar compiles fund flows to pinpoint the three least popular stock fund categories, and advises investors to consider allocating a greater amount of their portfolio to the "unloved" funds of the year. "Fund flows are a contrarian indicator because [investors are] chasing what's gone up, by and large," says Russel Kinnel, Morningstar's director of mutual fund research.

Historically, "unloved" funds tend to outperform their benchmarks over the next three- and five-year periods. At the same time, the "loved" funds, or the three-best performing asset classes, generally lag their benchmarks. From the beginning of 1994 to the end of 2010, the "unloved" funds earned an annualized 9 percent, compared with an annualized 6 percent gain for the "loved" funds, according to Morningstar. (By comparison, the S&P 500 returned an annualized 8 percent over that time period, and MSCI World Index returned an annualized 4.6 percent.)

Large-cap funds saw outflows in 2010 for a number of reasons, experts say, but primarily because other asset classes like small-cap funds and emerging markets funds--which ranked among the "loved" funds--performed much better. Regardless of how they perform year to year, large-cap funds deserve a spot in your portfolio, Kinnel says. The large-blend category is home to some of the best-known index funds and a number of funds that offer varying strategies. Because of the range of options in this category, "you can really be choosey," he says, and search for experienced managers and funds with low expenses.

With that in mind, here are U.S. News's best large-blend funds for the long term:

Parnassus Equity Income (PRBLX)

At this socially responsible fund, management uses a number of environmental and governance screens and avoids companies in industries like alcohol and tobacco. Management seeks companies with strong balance sheets, and shows a strong preference for dividend-paying stocks. About 75 percent of the fund's 41 holdings pay a dividend, according to Morningstar. But with a portfolio yield of just over 1 percent, yield-hungry investors may be disappointed. However, the fund's long-term returns rank among its category's highest percentile. Over the past 10 years, the fund has returned an annualized 7 percent. Its annual fees are 0.99 percent.

Madison Mosaic Disciplined Equity (MADEX)

Co-manager Jay Sekelsky and his team prefer conservative blue chips like Johnson & Johnson that have demonstrated their earnings potential over the years. Other large holdings in the fund include tech giants Microsoft and Google and energy companies Chevron and Schlumberger. Currently, the portfolio contains about 50 stocks. Over the past 10 years, the fund has returned an annualized 2 percent. Its annual fees are 0.95 percent.

Oakmark Fund (OAKMX)

According to Morningstar, "This traditionally was one of the purest value funds around, but lead manager Bill Nygren has found more fallen growth stocks that meet his valuation criteria." Currently, the fund holds about 50 stocks that are diversified across a number of sectors. Some of Oakmark's largest holdings include Oracle, Apple, and Medtronic. The fund has returned an annualized 6 percent over the past 10 years. Its annual fees are 1.11 percent.

Payson Total Return (PBFDX)

Like many other funds on this list, Payson Total Return has a concentrated portfolio. It holds about 40 stocks, and also contains a small fixed-income position, made up of exchange-traded funds that short--or bet against--long-term treasury securities. Top holdings include blue-chips ExxonMobil, Johnson & Johnson, and Wal-Mart. Its sector weightings are mostly in line with the S&P 500. Over the past 10 years, the fund has returned an annualized 2 percent. It charges annual fees of 1.59 percent.

Invesco Van Kampen Exchange (ACEHX)

The fund, which is currently closed to new investors, has returned an annualized 3 percent over the past 10 years. Its annual fees are 0.52 percent.

Mairs & Powers Growth (MPGFX)

This fund's unique strategy has allowed it to outpace many of its peers over the past decade. Management invests in a fair amount of small- and mid-cap companies because it believes that over time, they will have higher returns than their large-cap counterparts. It also maintains a regional focus with a preference for companies in the upper Midwest region of the United States, particularly Minnesota. The fund's two largest holdings are 3M and Target, both of which are based in the region. Over the past 10 years, the fund has returned an annualized 10 percent. Its charges 0.71 percent in annual fees.

Manning & Napier Tax Managed (EXTAX)

Management takes care to minimize taxes when buying and selling securities for the fund. The fund currently holds about 70 stocks, including a fair amount of smaller companies and a 20 percent allocation to foreign firms. The fund is currently heavy on media companies, such as the Washington Post Company. Over the past 10 years, the fund has returned an annualized 5 percent. Its annual fees are 1.2 percent.

Croft Value (CLVFX)

Gordon Croft runs this fund along with his two sons, Kent and Russell. The team invests in companies of all sizes and is known for its high-conviction picks. Generally, the managers look for stocks they believe are trading at discount, but they won't shy away from other opportunities. That's why the fund holds Apple, along with value names like timber company Weyerhaeuser. The fund has fairly large energy holdings in the United States and overseas, in places like Canada and Colombia. It has returned an annualized 5 percent over the past 10 years. Its annual fees are 1.32 percent.

Henssler Equity (HEQFX)

Management generally sticks to the sector weightings of the S&P 500 and prefers high-quality companies with a history of financial stability and earnings growth. The fund has large holdings in the industrial materials sector, in companies like General Electric. Over the past 10 years, the fund has returned an annualized 3 percent, and its annual fees are 1.28 percent.

 

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The Triumph of Value Investing: Smart Money Tactics for the Postrecession Era

The Seven Deadly Sins of Investing: How to Conquer Your Worst Impulses and Save Your Financial Future

Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back

What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions

 

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