These Bull Market Funds May Have Room to Run

Investing milestones may come and go, but Sunday's fifth anniversary of the current bull market is worth pausing to appreciate. Only five other bull markets since 1926 have lasted as long, and though there are no guarantees this bull will live to see six candles on its cake, the current anniversary is as good a time as any to look back at funds that have performed particularly well during that time span and may be positioned to keep the party going.

Since closing March 9, 2009, at 676.53, the S&P 500, a widely used index of large- and mid-cap U.S. stocks, has more than doubled.  Vanguard 500 Index (VFIAX), one of the cheapest funds tracking the index, returned about 25% per year during the bull market's first five years--not a bad deal at all for investors content to reap market returns during that time. But some large-cap funds have done even better.

Owning a fund that outperforms may feel great, but if most of its holdings have become overvalued, it could be a recipe for future underperformance. Below is a list of large-cap funds that have ridden the bull the best, but whose portfolios remain cheaper than the overall market. That is to say, these large-cap funds had the highest five-year annualized returns through March 9 among funds whose portfolios had P/Es below the market average at the end of last year.

The P/E ratios on the table are based on trailing 12-month earnings, and Dec. 31 is used as a cutoff date to ensure consistency, though some funds have reported more recent portfolio data. Fund P/E data is weighted according to each holding's size relative to the portfolio. For our valuation benchmark we used Vanguard 500 Index, which ended 2013 with a trailing 12-month P/E of 18.62. We pulled all data from the Morningstar Direct platform, though in some cases more up-to-date P/E data for funds based on forward-looking earnings projections are available on Morningstar.com, under the Portfolio tab.

When looking over the P/E ratios, keep in mind that last year the S&P 500 gained 32%, including dividends. This particularly strong market performance pushed up valuations on many equity funds' holdings, so a below-market-average P/E here doesn't necessarily mean a fund's holdings are cheap relative to historic norms.  

Large-Cap Funds That Rode the Bull
Fund	Category	Analyst Rating	% 5-Yr Return *	P/E**
Matthew 25 (MXXVX)	Large Growth	N/A	39.77	17.45
Vanguard Capital Value	Large Blend	Bronze	36.42	16.22
Upright Growth (UPUPX)	Large Growth	N/A	35.18	17.54
Huber Capital Equity Income (HULIX)	Large Value	N/A	34.65	13.76
Cambiar Aggressive Value	Large Value	N/A	33.97	14.89
MassMutual Slct Foc Val (MFVAX)	Large Blend	N/A	33.13	16.64
Snow Capital Opportunity (SNOAX)	Large Value	N/A	32.78	14.02
SunAmerica Foc Div Strat (FDSAX)	Large Value	N/A	32.64	17.06
Fidelity Large Cap Stock (FLCSX)	Large Blend	Silver	31.76	18.17
Oakmark Select (OAKLX)	Large Blend	Gold	31.46	15.23
LWAS/DFA US High Bk/Mkt	Large Value	N/A	31.01	15.50
ClearBridge Agg Growth (SHRAX)	Large Growth	Bronze	30.90	18.15
Hotchkis/Wiley Lg Cap Val (HWLAX)	Large Value	N/A	30.55	13.65
Fidelity Advisor Dvrsfd Stk (FDTOX)	Large Blend	Neutral	30.35	17.83
Oakmark (OAKMX)	Large Blend	Gold	30.33	16.67
Federated Kaufmann Lg Cap (KLCAX)	Large Growth	N/A	30.22	16.44
Gabelli Value 25 (GABVX)	Large Blend	N/A	30.12	17.25
JPMorgan Value Advantage (JVAAX)	Large Value	Silver	29.99	16.20
Smead Value (SMVLX)	Large Blend	N/A	29.81	18.52
Hotchkis/Wiley Dvrsfd Val (HWCAX)	Large Value	N/A	29.75	14.16
Source: Morningstar * Annualized Return as of March 9 ** As of Dec. 31

Although inclusion on the list indicates that a fund has delivered outsized gains during the past half decade, the annualized return numbers in themselves may not tell the whole story. In some instances, funds may have bounced back from unusually bad drops during the bear market of 2008. For example, Upright Growth (UPUPX), at number 3 on our list, lost 58.6% in 2008, making it one of the worst performers among mid-growth funds that year (the fund moved up to the large-growth category the following year). By rebounding with 35% annualized gains in the five years since, Upright Growth makes our list of top large-cap performers, but before buying the fund, investors should keep in mind how it performed while the bear raged.

In addition, a fund's inclusion on this list of top bull market riders shouldn't be construed as a recommendation. First, strong recent performance is no guarantee of strong future performance. Second, though Morningstar fund analysts have vetted and recommended some funds on the list, others have neither undergone such a screening nor are recommended. Finally, as this recent Fund Spy article points out, some quality funds that have lagged during the bull market still may be worth your while. Don't let the past five years be your sole guiding principal when shopping for large-cap funds. The next five years are all but guaranteed to look different one way or another.