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What's the Best Way to Play a Large-Growth Rally?

You'll be surprised at which funds are poised for a large-growth rebound.

John Coumarianos, 04/04/2006

Morningstar analysts have been wondering when the tide will turn--that is, when the large-growth category will come back into favor.

Small caps turned into the darlings after the tech meltdown beginning in 2000, and they haven't suffered for investor affection ever since. In fact, the first quarter of 2006 shows a continuation of this trend, with small- and mid-caps leading the way and larger caps bringing up the rear. One change that we've noticed over the past six months or so is that small growth and mid-growth are beginning to outstrip their value counterparts. This hasn't happened in large-cap land yet, where value still rules the roost.

Nevertheless, we don't think large-growth stocks can remain neglected forever, and we've been hearing many fine managers say that large-growth stocks haven't been this cheap in a long time.

But is owning a large-growth fund the best way to play a rotation back to large-growth stocks? The fact is that many of our favorite value-oriented and blend funds have been picking up fallen growth angels lately. Many high-quality growth businesses with stagnating stock prices are appearing attractive to investors who ordinarily look for precipitous price drops or companies with temporary problems.

In other words, the combination of steady earnings growth and stock-price stagnation has caused some growth stocks to "grow" their way onto value and blend investors' initial screens. In this week's column, we'll discuss some of the most compelling nongrowth funds that have begun to trawl large-cap-growth waters. Their holdings may surprise you.

We should note, however, that none of these funds, with the possible exception of the Vanguard offering, has much technology exposure. This means they would lag in a tech-led rally, similar to the kind we saw in the late 1990s. However, barring an outright return to the tech-led frenzy of that time, these value and blend funds could capture a rebound of slower growth large- and mega-cap stocks quite well.

American Funds Washington Mutual AWSHX

This steady Eddie value fund owns growth-oriented names such as Microsoft; pharmaceuticals Abbott Laboratories ABT, Bristol-Myers Squibb BMY, and Merck MRK; retailer Wal-Mart; and global package delivery service United Parcel Service UPS.

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