Large-Cap Index Beaters

Last week, as part of our ongoing Index Beaters series, Five-Star Investor looked at foreign large-cap funds that beat a proxy for international stocks. This week we turn our sights closer to home to search for domestic large-cap funds that beat the market over the medium and long term.

Domestic large-cap funds continue to account for a huge chunk of the fund universe, representing $2.6 trillion and nearly 30% of all mutual fund assets as of the end of September. At the same time, investors have pulled $91.6 billion out of domestic large-cap funds during the past year amid a mass exodus to the perceived safety of bond funds (some money has also flowed into exchange-traded funds investing in U.S. stocks). However, those who've stuck with large caps have been well-rewarded, with the S&P 500 gaining 20% during the 12-month period ended Oct. 15.

A quick visit to Morningstar's
Premium Fund Screener tool finds that more than 200 actively managed large-cap funds beat  Vanguard 500 Index (VFINX), a proxy for the S&P 500, during the past year (including institutional funds and those closed to new investors; the screener doesn't allow for direct comparison with the S&P 500). But how many can boast a longer track record of beating that simple low-cost investment?

To find out, we looked at the universe of actively managed large-cap funds that have been in existence for at least a decade. Out of 752 funds that qualify, 176 (23%) beat both the five- and 10-year annualized returns of the proxy. (Funds that no longer exist were not included.) As we've seen with other categories, these performance records speak to the difficulty of beating an index over the medium and long term. But they also serve as proof that some active managers do outperform the index--even during long periods--and reinforce the importance of doing your research before investing in actively managed funds to identify those that are most likely to perform to your expectations.

To find actively managed domestic large-cap funds vetted by Morningstar analysts and that might appeal to new investors, we whittled down our list of index beaters, excluding institutional funds and those closed to new investors. We also looked only for funds with Morningstar Analyst Ratings of Gold or Silver to identify the portfolios with the best chance of outperforming their peers on a risk-adjusted basis. Premium Members can see the full list here, and below we show a few examples.

FMI Large Cap (FMIHX)
5-Year Annualized Return: 3.4% | 10-Year Annualized Return: 10.2%
Lead manager Pat English and team have built a solid long-term track record by buying strong, durable businesses whose prices are suffering and selling them into strength. The fund's concentrated portfolio of 29 stocks is led by 3M (MMM) and Wal-Mart Stores (WMT), both at about 5%. Morningstar fund analyst Michelle Canavan likes the management team's patient and disciplined process, which, despite subpar recent returns (the fund lags the S&P 500 by 3.4 points during the past year), has delivered top 5th percentile performances in the large-blend category during the trailing five- and 10-year periods.

American Funds American Mutual (AMRMX)
5-Year Annualized Return: 1.9% | 10-Year Annualized Return: 7.5%
Part of the key to this conservatively run, large-value load fund's long-term success has been its ability to weather bear markets better than its peers. For example, its 30% loss in 2008 was 7 points better than those of the category average and the S&P 500. The fund's veteran management team focuses on industry-leading, dividend-paying firms with sustainable competitive advantages. Top holdings include Abbott Laboratories (ABT), Verizon Communications (VZ), and Home Depot (HD). The fund is overweight in industrial stocks while underweight in financials, and managers aren't afraid to hold cash and bonds (11% of the portfolio) if they don't see equity opportunities. This broker-sold fund's 0.62% expense ratio is low for the large-cap front-load group.

T. Rowe Price New American Growth (PRWAX)
5-Year Annualized Return: 3.2% | 10-Year Annualized Return: 9.1%
Lead manager Joe Milano took the helm 10 years ago, and his small- and mid-cap roots are reflected in this fund's 45% stake in those smaller issues, which is about double the large-growth category average. Within this all-cap approach, Milano looks for fast-growing companies with durable long-term prospects and stable growers with stock prices that have declined. The portfolio holds more than 100 stocks, led by  Apple (AAPL) at 5%. The fund's 24% weighting in industrials is more than double the category average. The fund has tended to outperform peers in both down and up markets, with five- and 10-year annualized returns each around the 10th percentile for the category. At 0.81%, fees are below-average for a large-cap no-load fund.

Portfolio data as of June 30; performance data as of Oct. 15.