How the 20 Largest Stock Fund Shops Are Performing

We visit scores of fund companies and talk to hundreds of fund managers in order to understand the human side of funds. The data is just as telling as the soft side, and they don't always agree.

For a just-published article in Morningstar FundInvestor, I offset insights gleaned from fund company visits with the cold hard facts on performance at those firms. That article focused on just a few firms but I actually ran the data for the 20 largest domestic-equity firms. I'll share all that data with you here.

To get a handle on how well the various firms are executing their domestic-stock research, I looked at returns for domestic-stock funds for the trailing three years ended Oct. 31, 2006, and Oct. 31, 2003. I asset weighted those performance figures based on asset levels at the beginning of the period, meaning that larger funds got a greater weight in the performance calculations and smaller funds had less.

You can see the results in the table included here. Some weren't very surprising, but others were. One final note: The law of large numbers means that firms with lots of domestic-stock funds are more likely to be closer to average while there's a greater chance that smaller lineups can be at the extreme ends of the performance scale. Consider a firm with three equally sized domestic-stock funds. If two have great performances, the firm will have great overall figures. But, a firm with 30 funds is much less likely to have 20 funds enjoying outstanding performance.

Fund Family Category Ranking Shifts
	Asset-Weighted Three-Year Category Rank 10-31-2006	Asset-Weighted Three-Year Category Rank 10-31-2003	Change in Rank
Dodge & Cox	5.00	1.00	-4.00
Davis Funds	10.77	9.69	-1.08
Columbia	25.45	44.37	18.92
Janus	29.09	70.55	41.46
T. Rowe Price	29.18	21.35	-7.83
Vanguard	29.91	40.42	10.51
Franklin Templeton	35.73	56.44	20.71
Pioneer	43.62	39.91	-3.70
DWS-Scudder	43.62	53.83	10.21
American Funds	45.56	27.29	-18.27
JP Morgan	46.10	59.15	13.05
AIM Investments	47.08	75.24	28.17
MFS	48.47	79.22	30.75
Wells Fargo Advantage	48.89	43.12	-5.77
Fidelity Investments	50.14	44.77	-5.38
BlackRock	50.37	83.03	32.66
OppenheimerFunds	51.67	48.04	-3.63
Van Kampen	54.13	76.74	22.61
Putnam	63.33	72.05	8.72
American Century Investments	71.36	33.35	-38.01
1=best and 100=worst. Morningstar data.

I'll start with the good stuff. I've ranked the fund companies based on weighted performance for the past three years.

Top Performers
1. Dodge & Cox has only one domestic-stock fund--the closed  Dodge & Cox Stock (DODGX)--and it now has $64 billion in assets. But kudos to the firm for continuing to produce great relative performance. Although its showing in 2006 has been middling, the fund has beaten more than 90% of large-value funds for the three-year period and that follows a great performance the prior three years (from 2001 through 2003) in which it beat 99% of its peers.

2. Davis/Selected Funds has a pretty similar story. Davis runs just a handful of domestic-stock funds and nearly all the money is in the very successful  Davis NY Venture (NYVTX) and  Selected American (SLADX) funds. Those two are nearly clones, and they've done quite well. The funds are run by Chris Davis and Ken Feinberg, who are long-term value investors in the Buffett mold. As with Dodge, the key here for future success will be effectively managing very large sums of money.

3. Columbia--and now for something completely different. Whereas our first two firms are small manager-owned boutiques, Columbia is a leviathan crafted from scores of mergers done by parent company BankAmerica. In fact, B of A just bought U.S. Trust, which runs the strong-performing Excelsior funds. I shouldn't be too surprised to see them here because they placed number three in a column I wrote in January on the best shops of 2005.  Yet, I still am kind of surprised.

The asset-weighting is a big help to Columbia because two boutique firms owned by its parent company, Marsico and Wanger Asset Management, play a big role in the firm's strong performance. After a slew of mergers, most Columbia funds are directly controlled by the firm's Boston-based asset management arm, but others like Wanger and Marsico are more autonomous. Thus, Marsico and Wanger's success doesn't say that much about the bigger group's abilities. Even so,  Columbia Mid Cap Value (CMUAX), which is part of the Boston group, is a large fund with an excellent track record, so it's clear that Wanger and Marsico aren't the only cylinders that are firing. Some of Columbia's smaller value funds are doing well, too, including  Small Cap Value II (COVAX) and  Disciplined Value . Some of the growth funds not under the Marsico and Wanger groups have been less impressive, though.

Most Improved
We visited Janus in the summer and were impressed by CEO Gary Black's continuing efforts to improve the quality of research there, and darned if the numbers don't back up that impression. Janus went from lagging 70% of its peers from 2001 through 2003 to leading 70% of its peers over the past three years, and it has done so while still being pretty aggressive. Three of the firm's most aggressive funds have led the way.  Janus Twenty ,  Janus Contrarian (JSVAX), and  Janus Orion (JORNX) all have top-percentile performance for the trailing three years.

It's great to see this turnaround because history shows that turnarounds at asset managers are a rare thing.

Bottom Three
Now to look at those firms at the bottom of the performance list. Each has some bright lights but not enough to help the typical investor at the firm.

18. Interestingly, Van Kampen managed to finish three slots from the bottom and yet it's also one of the most improved. The firm's ranking for the past three years is slightly below average but it was bottom quartile on average for the prior three years. One fund that's had a huge improvement is Van Kampen Small Cap Growth , which has top-decile returns for the past three years following a poor performance the prior three years.

Among Van Kampen's largest funds,  Van Kampen Strategic Growth  and  Van Kampen Pace  have been holding the firm back. Strategic Growth is a fund that places great emphasis on high growth rates, yet the markets have punished that strategy in recent years. Pace is one we've become more optimistic about since Dennis Lynch came on board in 2004. He's had success at other funds but it hasn't shown up at Pace yet.

19. In contrast with Janus' turnaround, Putnam is demonstrating just how hard it can be to pull off a turnaround at a struggling shop. Putnam's weighted performance shows it has only bested 37% of its peers on average. That's a slight improvement but still disappointing given that we're about four years into Ed Haldeman's effort to remake the firm. I'm not the only one to notice this, though. Investors continue to stay away, and parent  Marsh & McLennan (MMC) is trying to sell the firm. With the notable exception of Putnam New Opportunities (PNOPX), Putnam's largest funds are mired in an awful slump. Striking, too, is the dearth of winners. Of the funds in the Morningstar Style Box categories, only  Putnam Small Cap Value (PSLAX) and  Putnam Investors  have top-quartile performance over the past three years.

20. American Century only managed to beat about 28% of its peers on an asset-weighted basis. That's a big disappointment after the prior three years when it beat two thirds of its peers. The reason in three words:  American Century Ultra (TWCUX). Like Van Kampen Strategy, this fund is suffering for being way out to the upper-right side of the style box at a time when the market has rewarded the lower-left (small-value) side. The fund is by far American Century's largest, so it stings when this fund goes in the tank. In June, the firm brought in Tom Telford from New Opportunities II  to turn this fund around.

 American Century Select (TWCIX) is an even bigger disappointment because it's supposed to be using a conservative, valuation-sensitive growth strategy, but its three-year numbers are even worse than Ultra's. American Century made a manager change earlier this year and brought in Harold Bradley to try to right the ship. On the plus side,  American Century Value  (TWVLX) has been a standout, but it's not enough to outweigh its bigger, lamer siblings.

Poll Results
Last week I asked who you would pick for Manager of the Year if you had a vote, and here's how it went (perhaps with a little help from fund company employees):

30% - Jay Sekelsky

8% - Arnie Schneider

38% - Nicholas Kaiser

6% - Mason Hawkins and Staley Cates

18% - Bruce Berkowitz