Good Large-Growth Funds for Your IRA

With April 15th, 2004, approaching, the time to make 2003 contributions to an IRA is running short. Those under 50 can invest up to $3,000 in a Roth or traditional IRA, while those age 50 or more have a $3,500 limit (in all cases annual income limitations exist). Tax-deferred portfolios can grow more quickly than taxable ones, and the gains on Roth IRAs are tax-free. In other words, you don't want to miss this opportunity.

While you can put just about any kind of fund into an IRA, we're highlighting large-growth funds. They can make excellent core funds for a portfolio. And of the nine categories based on the Morningstar Style Box, the bear market hit large-growth funds the hardest. Arguably, they have the most potential upside at this point.

Few investors enjoyed the nasty 2000-2002 downturn, but it provides a handy performance analysis opportunity. Funds that guarded assets on the way down better than peers have proven defensive capability. And those that also participated in the 2003 rally clearly have a decent offense. That's the basis of the search we'll create in our Premium Fund Screener.

Before getting to performance, we'll narrow the universe of funds to large-growth funds suitable and available for IRA purchases. First, we'll look for only no-load funds, since you want every dollar to count in these constrained accounts. Next, we'll make sure that the minimum allowable investment in an IRA is $3,000 or lower (one can adjust this amount to $3,500). Third, we'll screen out funds closed to new investors. Finally, we'll choose the large-growth category.

Now we'll screen for performance. The Premium Fund Screener allows us to look for rankings within a category either by trailing period (three years, five years) or calendar year (1998, 2002). We'll find funds that were above-average within their category in bear years 2001 and 2002, and rally year 2003.

Finally, to eliminate expensive funds, we'll make sure the expense ratios on all funds are 1.25% or lower.

This screen yields 20 funds. Click  here to run it for yourself.

The list includes plenty of standout funds, but we'll highlight just three, from the most bold to the most conservative.

 Fidelity Capital Appreciation (FDCAX)
This Fund Analyst Pick might seem most notable for its 52% gain in 2003, which was about as good as it got for large-growth funds last year. Given its bold leanings, however, its 7.5% loss in 2001 was equally impressive. Harry Lange's bottom-up process finds growth in a variety of sectors in different environments. The bulk of the portfolio is in true large caps, with roughly even weightings in giant stocks and mid-caps. It's the most expensive of the three highlighted funds, but hardly costly.

 Vanguard Morgan Growth 
This fund's three managers, Vanguard's Gus Sauter and John Cone and Wellington's Robert Rands, each run a slice of this fund. Sauter and Cone run enhanced-index approaches on the MSCI U.S. Prime Market Growth Index and the Russell Midcap Growth Index, respectively. Meanwhile Rands picks growth stocks across all cap sizes. The results the past three years have been stunning: top quartile returns across the board. The fund isn't ideal for those with heavy mid-cap exposure but will suit cheapskates nicely.

 T. Rowe Price Growth Stock (PRGFX)
Few will be surprised that T. Rowe Price's offering is the tamest of the three. Manager Bob Smith tends to hold lower weightings in technology and health care than most peers do, often favoring defensive financial stocks. Unlike the two funds discussed above, this portfolio is nearly all large caps, with a $38 billion average market cap. While it did quite well in 2003, it looked tepid in go-go years 1998 and 1999.