The Least Compelling Funds at the Largest Fund Firms

In the past few years, most of the biggest fund companies have only gotten bigger. In general, the trend has been a positive one because some of these families offer relatively inexpensive funds and plenty of experienced management. That bodes well for long-term investors.

Still, as much as there are some good reasons for this "flight to quality," investors shouldn't forget that there are some weak spots in each family's lineup. As such, I polled the Morningstar analysts who cover the seven largest fund families to see which fund they thought was the least compelling investment each firm offered. Below are their selections:

 Vanguard U.S. Growth  (VWUSX): It's no fun to kick a fund when it's down, but we don't think this offering stands out in a crowded category. While performance has steadied somewhat of late, the reality of the matter is that there are plenty more-proven large-growth choices. In other words, there's seemingly little reason for investors to stick their necks out for this fund. (On the flip side, we remain fans of  Vanguard Dividend Growth (VDIGX). Despite its recent bout of underperformance, we think that fund is on more solid fundamental footing. In fact, given how dividend-paying stocks have generally underperformed in recent years, we think it has all the makings of an interesting contrarian choice.)

 Fidelity Destiny I  (FDESX) Fidelity Destiny II  (FDETX): With contractual plans going the way of the dodo, it's surprising that one of the nation's premier fund shops continues to offer these costly funds. They require investors to commit to at least 10 years of systematic investments. The price of entry is quite high; investors pay commissions of up to 50% in the first year. Those who stick with the plan pay a more reasonable price over time, but investors who withdraw early may pay hefty penalties. Our suspicion is that many fall in the latter camp. (According to the NASD, the records of First Command, one of the primary sellers of contractual plans, showed that only 43% of those who started a 15-year contractual plan in a certain period actually completed the plan.)

 American Funds SmallCap World  (SMCWX): This fund is a bit of an odd duck, given its global small-cap mandate. Still, we think it's too sprawling--only one pick accounted for more than 1% of assets at the end of 2004--and that its asset growth will continue to impinge on its ability to build meaningful positions in companies with market caps of less than $2 billion. If you compare it with the small group of funds with a similar mandate, it doesn't stand out, either.

 Templeton Global Opportunities  : Franklin's Templeton unit offers a total of five world-stock funds, and this isn't among the ones we like. Not only is it overpriced, but its manager has a relatively short tenure, and it has few characteristics that distinguish it from its siblings. Indeed, some offer similar strategies with more experienced management and lower costs.

 PIMCO Municipal Bond  (PMLAX): This fund falls short when compared with the rest of PIMCO's lineup. Manager Mark McCray has been very conservative, which is fine, but despite sharing the same macro themes as his PIMCO colleagues, he hasn't applied them as well here. While the institutional share class has turned in an acceptable five-year performance, the other, more expensive share classes have worse records. And given that muni funds aren't used in 401(k)s, where low-cost institutional share classes are most often used, the case for this fund is even weaker.

 T. Rowe Price International Stock  (PRITX): T. Rowe Price is in the process of overhauling its international research operations, but until the process is complete, there's little reason to sign on here. We simply think that the fund is too unimaginative and doesn't do enough to distinguish itself. That's in contrast to many of the firm's domestic choices, which are also very diversified but much more active and contrarian. An index fund is a superior choice to this fund, in our view.

 Putnam Growth Opportunities  (POGAX): This is a mega-cap growth fund, so there are plenty of legitimate reasons as to why it's been out of favor. In fact, it may be primed for a comeback. But longer term, we question how much value Putnam can add here given the efficiency of this space and the fund’s overall lack of flexibility. Indeed, the fund won't stray far from the stocks that are part of the Russell Top 200 Growth Index.

Note to Morningstar.com members: This week Morningstar changed the name of the Fiduciary Grade for funds to the Stewardship Grade for funds. We feel the new name better captures the mission of the grading system, which is to assess the level of alignment between managers, boards, and management companies and the fundholders they serve.