Large and midcapitalization equity funds topped the one-year returns of equity mutual funds most used by defined contribution plan investors in 1996.
In 1995, small-cap funds predominated in the top 10 in one-year performance despite underperforming small-cap indexes. But larger was better in 1996, as equity funds with higher market capitalization targets produced better performance. Of the 10 best performing equity funds in Pensions & Investments' latest survey, seven were large-cap funds, two were with midcap funds and one was a small-cap fund.
P&I's annual mutual fund survey ranks the top 50 best equity and 50 fixed-income performers from the universe of the 100 equity and bond funds with the most defined contribution plan assets.
Performance information for all funds is provided by Morningstar Inc., Chicago.
Despite the fallback on small-cap stocks, they still played a strong secondary role in the performance success of most of the top funds with large- and midcap targets, said Scott Lummer, a managing director at Ibbotson Associates, Chicago.
"Small-cap stocks did well last year. They typically do better in bull markets. In addition to the all small-cap Franklin (Small Cap Growth) Fund, some of the larger cap funds on this list, like the Janus (Twenty) Fund, (Vanguard) Windsor, the Merrill Lunch Growth (A) and even the Vanguard U.S. Growth funds have a strong small-cap component. These funds aren't dominated by small-cap investment, but they have a lot of small-cap exposure," Mr. Lummer said.
In a year when the Russell 2000 Index returned 16.49% and the Standard & Poor's 500 Index came in at 22.96%, Mr. Lummer said the addition of well-chosen small-cap stocks made the difference in returns of large and midcap funds.
The Merrill Lynch Growth/A Fund, a midcap growth fund, was the top performer with 29.7%. Second was a large-cap growth fund, Janus Twenty, at 27.8%. The Franklin Small-Cap Growth Fund was third with 27%, Neuberger & Berman Partners fund was fourth with 26.6% and Vanguard Windsor was fifth with 26.3%.
Growth funds were prevalent in the top 10. Six funds used a growth equity strategy, while three blended growth and value. Only one fund - Vanguard's Windsor Fund - used a strict value approach.
But while large-cap funds dominated the top one-year rankings, they were squeezed out by midcap funds in five-year performance. Midcap funds grabbed eight of the top 10 spots for the five years ended Dec. 31, while small-cap funds fill out the rankings.
The small-cap PBHG Growth Fund topped the five-year list with 26.7%. The midcap growth T. Rowe Price Science & Technology Fund was second with 25%. All five-year returns are compound annualized.
The Putnam New Opportunities/A Fund, a midcap growth fund, was third with 22.8%, followed by the midcap Merrill Lynch Growth/A Fund with 21.3% and the small-cap growth T. Rowe Price New Horizons Fund with 19.8%.
The Neuberger & Berman Partners Fund, managed by Michael Kassen and Robert Gendelman, is a midcap fund with a value orientation, though it blends growth and value strategies. The $2.7 billion fund was fourth for the year, 10th for the five years with 18.1% and eighth on the risk-adjusted, five-year list with 15.6%.
Mr. Kassen attributed the one-year return to "some good luck."
Mr. Kassen said the fund got off to a good start in the first quarter because several stocks it held were acquired, including the acquisition of Loral Corp. by Lockheed Corp. and Stop & Shop Cos. by Koninklijke Ahold, a Dutch company.
Being underweighted in technology stocks early in the year helped avoid the tech stock rout, although Mr. Kassen said the fund felt little upswing because it began buying tech stocks just before the rally. Several other midcap companies produced better cash flow earnings than other analysts expected, including Price/Costco (now just Costco), E.I. DuPont de Nemours & Co., Wells Fargo & Co. and The Progressive Corp.
"We're looking for those midcap stocks that are under-noticed by the other investors. We sometimes get a research advantage this way. We look for companies that have possibly stumbled just a little," Mr. Kassen said.
Mr. Kassen attributed the fund's five-year returns to patience. "We're patient, we buy a lot of really good companies that have fallen from grace and then don't fall in love with them. We sell the winners when it's time and recycle the money into new undervalued companies," he said.
On the fixed-income side, funds were helped by an economy has been extremely good for high-yield bonds over the last two years and an environment of declining interest rates over most of the last five years that put high yield above all comers, said Ibbotson's Mr. Lummer.
"High-risk bonds in a declining interest rate environment have given managers great yields and capital appreciation," he said. "The returns for this asset class for the last two years has pulled the returns of these high yield funds up for the five year period, as well."
Not surprisingly, high-yield funds shoved out every other class in the top 10 rankings of one- and five-year performance. The AIM High Yield/A Fund was No. 1 for the year with 15.5% and fourth for the five years with 13.3%. The Franklin AGE High Income Fund was second for the year with 14.3% and seventh for the five years with 12.8%.
The Capital Research & Management-America High Yield Fund returned 14.1% for the year, which put it in a tie for third with the Fidelity Spartan High Income Fund.
The Spartan fund was No. 1 for the five years with 15.7%.
