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Slow Growth Stocks Haven't Stalled These Two Funds

Find out which large-cap funds shone last year despite an emphasis on blue chips.

Morningstar divides most stocks into eight categories, each of which defines a broad category of investment characteristics. For example, stocks in the slow growth category have shown slow revenue and earnings growth (typically less than the rate of GDP growth) over at least three years. By comparison, classic growth firms exhibit stronger growth in earnings and revenues and typically pay a dividend. While stocks from these categories generally lagged their cyclical and speculative counterparts from the March 9, 2009, market bottom onward, not all funds focused on these areas sat on the sidelines.

In a handful of steps, the Premium Screener can uncover funds that turned what appeared to be a disadvantage last year into an advantage and that sport other attractive qualities to boot. First, the screen zeros in on large-cap stock funds with more exposure to classic and slow growth firms than the S&P 500 Index, using  Vanguard 500 Index Investor (VFINX) as a proxy. It's set to pull funds that placed within the top third of their respective categories last year, and in order to limit the list to long-term winners, it narrows the field to offerings with top-quartile category rankings for the trailing 10-year period with manager tenures of at least 10 years. Turnover is set below the category average in order to point to a longer-term focus on slower-growing stocks. Lastly, the field is limited to reasonably priced funds that are open to new investments of $25,000 or less.

As of Feb. 2, 2010, the screen turned up just two funds. To run it yourself, click here.

 Longleaf Partners (LLPFX), a large-blend Analyst Pick, had a fantastic 2009. It gained 54% for the year, putting it roughly 27 percentage points ahead of the typical peer. Value hounds Mason Hawkins and Staley Cates fill this portfolio with firms that are trading at discounts of 40% or more to their estimates of their intrinsic value, which they determine through discounted cash-flow analysis, asset values, or sales of comparable firms. Management's decision to stick with larger positions in slow growth stocks including television and Internet retailer  Liberty Media Interactive (LINTA) and personal computer manufacturer  Dell  through their struggles in 2008 paid off handsomely last year, as the stocks gained 247% and 40%, respectively. The fund is still recovering from its nasty 51% loss in 2008, and individual stock blowups can have a big impact on this compact portfolio. But management has proved the soundness of its process and stock-picking over the years.

 Yacktman (YACKX), by contrast, had strong relative showings in both 2008 and 2009. It lost 26% in 2008, which was 11 percentage points less than the large-value category norm, due in part to management's decision to sock roughly 20% of assets in cash as of September 2008 and focus on annuitylike businesses such as  Coca-Cola (KO). But managers Donald Yacktman and Stephen Yacktman reinvested that stake in time for the rally, contributing to the fund's 59% gain last year, which outpaced the typical peer by roughly 33 percentage points. The managers favor consumer- and service-oriented stocks that have strong cash flows, little debt, and discounted stock prices, and the fund had around 45% of assets invested between classic and slow growth stocks at last count. Liberty Media was also a big contributor to this fund's recent results, as were pharmaceutical behemoth  Pfizer (PFE) and software titan  Microsoft (MSFT), which fall into the slow and classic growth camp, respectively. These managers also run a relatively compact portfolio, and the aforementioned stocks soaked up roughly 11% of assets as of Dec. 31, 2009. So, the fund has also been prone to dry spells given management's independent streak and big bets on individual stocks and industries. But strong stock-picking should help it keep shining over the long haul.

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Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.