Large-Cap Medalist Funds in a Five-Year Funk

It has now been just about five years since the stock market hit bottom in the wake of the 2008-09 financial crisis. Since then, stocks have done very well, despite quite a few bumps along the way. As of Feb. 21, the S&P 500 index has an annualized five-year return of 21.6%, including a 32.4% gain in 2013, and small- and mid-cap stocks have performed even better.

It's no surprise that equity mutual funds have posted strong returns during this bull market, but not all funds have benefited equally. Among the large-cap domestic stock funds that form the core of most people's portfolios, the best performers over the past five years have tended to be those with relatively aggressive strategies, such as  Morgan Stanley Focus Growth , managed by 2013 Domestic Stock Fund Manager of the Year Dennis Lynch. On the other hand, cautious large-growth funds that avoid riskier, more-speculative names have tended to underperform their peers over that same time period.

Some of these funds that have lagged their peers during the past five years are still definitely worth owning. Here are five domestic large-cap funds with bottom-quartile five-year returns but Morningstar Analyst Ratings of Gold or Silver, meaning that they have numerous positive features and Morningstar analysts think they are likely to outperform over the long term despite short-term blips.

 American Century Equity Income (TWEIX)
Morningstar Analyst Rating: Silver
This large-value fund employs a cautious strategy in which income is a key priority. Roughly one fourth of the portfolio is invested in convertible securities, which typically feature healthy yields, and most of the rest is in high-quality dividend-paying stocks such as top holdings  Johnson & Johnson (JNJ) and  Exxon Mobil (XOM). This approach has been out of favor for most of the past five years, which is why the fund's five-year returns rank near the bottom of the large-value category. But its performance in 2008 was among the best in the category, and its 15-year returns rank in the group's top decile with far less volatility than the average large-value fund, helping it earn a Silver rating.

 Aston/Montag & Caldwell Growth (MCGFX)
Morningstar Analyst Rating: Silver
In contrast to the American Century fund, this is a large-growth fund with a management team, led by veteran Ron Canakaris, that pays little attention to income. Instead, the team seeks companies with long-term earnings growth prospects of at least 10% annually, positive earnings momentum in the past two quarters, and reasonable valuations. That valuation discipline, along with the fund's tendency to hold stocks with strong balance sheets and steady earnings histories, mean that it has usually trailed its large-growth peers in speculative bull markets but held up well in downturns. Despite its bottom-decile five-year returns, it posted top-decile returns in 2008 and 2011 and has handily beaten the category with very low volatility since its 1994 inception. That record, plus the discipline and experience of management, are the main reasons for its Silver rating.

 Jensen Quality Growth (JENSX)
Morningstar Analyst Rating: Gold
This is another growth fund with a distinctive, strict methodology. It can only hold companies with returns on equity of at least 15% in each of the past 10 years, and from that universe the managers identify 25-30 stocks with the best combination of growth prospects and valuation, typically holding onto these stocks for many years. As with the other funds on this list, this combination of valuation discipline and quality focus has held the fund back relative to its category peers over the past five years. But long-term results are excellent, especially on a risk-adjusted basis, and an experienced management team and low fees help it earn a Gold rating.

 Dreyfus Appreciation (DGAGX)
Morningstar Analyst Rating: Silver
The strategy here is similar to those of the Aston and Jensen funds, with an emphasis on financial strength and high returns on equity, but there's less focus on growth, so this fund lands in the large-blend category. One distinctive feature of the portfolio is the predominance of mega-cap stocks and near-total absence of small- and mid-caps, resulting in one of the highest average market caps in the category. That mega-cap emphasis has been a particular headwind the past couple of years, when smaller stocks have outperformed larger ones and this fund has badly trailed its category peers. Despite recent underperformance, the fund has beaten the category in two thirds of the rolling five-year periods over the past decade while holding up extremely well in downturns. That record, plus a very seasoned management team at subadvisor Fayez Sarofim, contribute to the fund's Silver rating.

 Vanguard Dividend Growth (VDIGX)
Morningstar Analyst Rating: Gold
Like American Century Equity Income, this Gold-rated fund owns dividend-paying stocks, but manager Don Kilbride is more concerned about dividend growth than yield for its own sake. Like the managers of Dreyfus Appreciation, he focuses almost entirely on well-established large- and mega-cap names, and like the Aston and Jensen funds, this offering holds high-quality stocks with robust profitability and strong balance sheets. While its returns were among the best in the large-blend category in 2011, it has otherwise had a hard time keeping up over the past five years. But its 10-year return ranks in the top decile with extremely low volatility, and its rock-bottom expenses (typical for Vanguard) make it stand out even more.