Growth mutual funds rebounded slightly from a gruesome second quarter and remain firmly in place at the top of Pensions & Investments' list of the best performing mutual funds most used in defined contribution plans.
While the third quarter proved to be better than the second quarter for most funds, it wasn't a particularly "hot" quarter, said Christine Benz, analyst with Morningstar Inc., Chicago. Most large-cap funds were down or flat, said Ms. Benz, because many of the megacap stocks continued to struggle. The top performers in the quarter tended to be niche-type funds, such as real estate and small-cap value, she added.
It wasn't all bleak for growth fund managers, however. "To the extent that you were in small or midcap growth stocks, you had a decent quarter," Ms. Benz said. Some of the hot growth industries were fiber optics and data storage.
It has been a particularly strong year for INVESCO, Atlanta, which boasts the best performing equity fund in the P&I universe for the one-year period ended Sept. 30, and the top performer year-to-date.
The INVESCO Technology Fund, managed by William Keithler, remains in the top spot for the 12 months, returning 102.9%.
The INVESCO Dynamics Fund, managed by Timothy Miller and Thomas Wald, jumped to sixth place for the one-year period ended Sept 30 with a return of 71.3%. By comparison, it was the 13th best performing fund for the one-year period ended June 30 with a return of 53.3%.
Year-to-date through Sept. 30 the INVESCO Dynamics Fund is the best performing mutual fund in the P&I universe with a return of 23.3%. It was also one of the biggest movers on the list of equity funds in the third quarter with a return of 10.4%. For the midcap growth fund, it was the second biggest jump in the quarter behind the value-oriented Vanguard Windsor II Fund, which returned 10.5%.
Second on the one-year list was the PBHG Growth Fund, managed by Gary Pilgrim, with a return of 88%.
Third was the Franklin Small Cap Fund, managed by Edward Jamieson, with a one-year return of 83.5% through Sept 30. The fund managed a 3.2% return in the third quarter and is up 14.8% year-to-date through Sept 30.
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The Franklin Small Cap Fund invests primarily in technology-related stocks, which have been driving much of its growth this year, said Mr. Jamieson, who manages the fund along with Michael McCarthy and Aidan O'Connell. They target fast-growing companies with distinct competitive advantages and strong management. The top holdings in the fund are PMC-Sierra Inc., I2 Technologies Inc., and BEA Systems Inc.
Mr. Jamieson said the San Mateo, Calif-based firm's location has been beneficial in enabling the management team to find good technology opportunities in small companies. "Many innovative small companies are located within 30 miles of our Silicon Valley headquarters, enabling us to get a firsthand look at companies operations and managements," said Mr. Jamieson. "We can spot the most important trends taking shape and incorporate the impact of these themes into our analysis."
Some of the areas they're looking at now include the semiconductor industry for utilities and the data storage network industry.
The Strong Growth Fund, managed by Ron Ognar, jumped to fourth place for the one-year period ended Sept 30 with a return of 81%. On the strength of a 7.7% return in the quarter, it jumped from seventh place in the one-year period ended June 30.
The fifth-place fund, the Putnam Vista Fund, managed by Eric Wetlaufer, also had a strong year. It is the third best performing fund year-to-date with a return of 21.3% and climbed to fifth from ninth place with a one-year return of 72.5%.
Mr. Wetlaufer said the strategy of the fund, which is co-managed by Marjorie Parker, Dana Clark and Tony Santosus, is to find midcap companies that are "in the sweet spot of their growth cycles." He looks for companies that are leaders in their particular niche "with the potential to expand to a broader market and remain leaders of tomorrow." Currently his top three holdings include Brocade Communications Systems Inc., Ariba Inc., and Allergan Inc.
Because of the market volatility this year, Mr. Wetlaufer said it has been more difficult than past years to manage a growth portfolio. However, he said, it also highlights which managers have done an effective job of navigating the markets.
"Those with discipline and who pay attention to risk are more likely to have consistent returns and do well in difficult years," he said.
In good health
This year, the managers reduced the fund's exposure to technology, dropping to 48% from 59%. The management team also added energy and health care stocks, increasing energy exposure to 7% from 4%, and health care exposure to 19% from 12%. The health care names are predominantly in biotechnology stocks, said Mr. Wetlaufer.
Falling out of the top five for the one-year period were the Fidelity Select Electronics Fund and the Janus Enterprise Fund. The Fidelity Select Electronics Fund, managed by Brian Hanson, fell to eighth after the third quarter with a one-year return of 70.6%. After the second quarter, it returned 112.3% for the year ended June 30 making it the only other fund beside the INVESCO Technology Fund with a triple-digit return. It plummeted with a return of -13.2% in the third quarter.
The Janus Enterprise Fund, managed by James Goff, fell to 10th place with a return of 60.6% for the one-year period ended Sept 30. Through the 12-month period ended June 30, it ranked fourth with a return of 76.6%. Its third quarter return was -1.5%.
Rounding out the top 10 for the one-year period ended Sept 30 were two Fidelity funds, the Fidelity New Millennium, managed by Neal Miller, which placed seventh, and the Fidelity Growth Company Fund, managed by Steven Wymer, which placed ninth. The New Millennium Fund returned 70.7% for the period on the strength of a 5.9% return in the third quarter. The Growth Company Fund returned 61.9% for the year, and was up 2.7% in the quarter.
For the five years ended Sept. 30, the Fidelity Select Electronics Fund remained the top performer with an annualized return of 39.6%, followed by the Fidelity New Millennium Fund with an annualized 37.5% for the same period.
The Janus Twenty, managed by Scott Schoelzel, placed third with 34%, followed by the INVESCO Dynamics Fund with a return of 31.9% for the same period.
Fifth is the Janus Mercury Fund, managed by Warren Lammert, with a five-year return of 31.8% through Sept. 30. Both the Mercury Fund and the Dynamics Fund moved into the top five for the period ended Sept 30, displacing the Janus Enterprise Fund and the Fidelity Aggressive Growth Fund, managed by Robert Bertelson. Both displaced funds remain in the top 10 with returns of 31.4% and 30.2%, respectively.
While fixed-income funds still pale in comparison to equity funds in terms of one-year returns, some fixed-income funds posted solid returns year-to-date and in the third quarter. The top five fixed income funds on the P&I list include a number of funds that invest in either mortgage-backed securities or long-term U.S. Treasury funds.
In the top spot is the PIMCO Total Return II Fund, run by William Gross. The fund, managed by Pacific Investment Management Co., Newport Beach, Calif., had a one-year return of 12% through Sept. 30, buoyed largely by large holdings in GNMA bonds and U.S. Treasurys. It returned 7.8% in the third quarter and is up 12.1% year-to-date through Sept. 30.
Second is the Oppenheimer Capital Income Fund, managed by John Doney and Michael Levine, with a one-year return of 11.4% through Sept. 30. Next is the Vanguard Long Term U.S. Treasury Fund, managed by Robert Auwaerter and Ian MacKinnon, with a one-year return of 9.5% through Sept. 30. Year-to-date through Sept. 30, it was up 11.7%.
Fourth is the team-managed Wells Fargo Diversified Bond Fund, with a one-year return of 7.9%, followed by the Vanguard GNMA, managed by Paul Kaplan, with a one-year return of 7.6% through Sept. 30.
The LM Western Asset Management Core Portfolio was the sixth best performing fixed income fund with a return of 7.4% for the one-year period ended Sept. 30.
In the seventh and eighth places are a couple of Ginnie Mae funds, the Fidelity Ginnie Mae Fund and the Federated GNMA Trust. The Fidelity Ginnie Mae Fund returned 7.4% and the Federated GNMA Trust returned 7.35% for the one-year period ended Sept. 30.
Rounding out the top 10 are the PIMCO Total Return Fund, the MAS Fixed Income Portfolio and the Firstar Bond IMMDEX Fund, which each posted one-year returns of 7.1%.
For the five-year period ended Sept. 30, high-yield funds rule the fixed-income roost. The top performer was the Oppenheimer Capital Income Fund, managed by John Doney and Michael Levine, with a five-year return of 13.2%.
Second is the Fidelity Capital & Income Fund, managed by David Glancy, with a return of 8.5%, followed by the Mainstay High Yield Corporate Bond Fund, managed by Donald Morgan, with a five-year annualized return of 8.3%.