January 2005  Email this  Print this
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FUNDS
Ripe for a Comeback
by Steven Goldberg
You are forgiven if you think the phrase winning growth stock is an oxymoron. For most of the past five years, stocks of (supposedly) fast-growing companies have, as a group, fizzled. But no trend lasts forever. Just as stocks of growth companies suddenly fell out of favor after surging in the late 1990s, they will again rise to the top. Signs point toward that shift occurring in 2005. Two of the biggest contributors to the growth slump, drug-company and technology stocks, seem poised to rebound. Stocks of both groups are unusually cheap. With the re-election of President Bush, investors will focus less on potential price controls on drugs. And there's plenty of pent-up demand from corporate America for high-tech gear.
As growth revives, these five funds -- two that are broadly diversified and three that focus on narrow sectors -- should pay off for you in the year ahead.
The tech fund to own
When the Nasdaq Composite Index soared 50% in 2003, it looked as if the bear market in tech stocks was over. But the bull didn't stick around for long. After being down as much as 13% at one point in '04, the index gained a modest 4% in the first ten and a half months of the year. When the bull runs again, Fidelity Select Technology (symbol FSPTX; 800-544-8544) will be the fund to own. Until 2004, it hadn't had a below-average year, relative to other tech funds, since 1996. It ranks in the top 20% among tech funds over the past ten years, with an annualized return of 12% to November 1.
Select Tech is not a sleep-tight fund. In fact, the fund is plenty risky, as its 84% plunge during the 2000-02 bear market underscores (Standard & Poor's 500-stock index lost 47% during the downturn). The fund had a rocky '04 as well, sinking 3% through mid November, mostly because of a large stake in semiconductor stocks. Manager Sonu Kalra, 33, is confident that chip stocks will bounce back once business spending on tech perks up.
The fund, which owns nearly 140 stocks, tilts toward tech's titans. Its top holdings recently were Microsoft, Cisco Systems, Dell, EMC and Intel. Kalra devotes his energy to what he calls "down-and-dirty research" to try to identify the winners in each tech segment. Kalra, who took over the reins in 2002, is Select Tech's sixth manager in ten years. But don't let Fidelity's revolving door spook you. Fidelity has more than 20 analysts covering tech stocks, and Kalra gets a lot of guidance from the higher-ups at Fidelity.
Blue-chip specialist
If you own blue chips such as General Electric, Microsoft and Motorola, you know how out of favor these stocks have been lately. As a result, stocks of big, growing companies are as cheap -- relative to slower-growing but undervalued large-company stocks -- as they have been since 1995, says analyst Jim Floyd at the Leuthold Group, a Minneapolis research firm. "The next big trend will favor growth stocks," he says.
A fine fund for riding the rebound in blue-chip stocks is Marsico Growth (MGRIX; 888-860-8686). Since its launch in 1997, the fund (which owns all three of the stocks mentioned above) has finished in the top half of large-company growth funds every year but 2000. Over the past five years, it lost an annualized 1%. That's nothing to brag about, but it's actually pretty good when you consider that large-company growth funds lost an annualized 6%, on average.
Manager Tom Marsico, 49, has practiced his craft for more than 20 years. He reduces risk and boosts returns by making shifts when he sniffs changes in the economy. Early in 2004, for instance, he sold half of his tech stocks because of concerns that business demand for high-tech equipment would soften. It was a prescient call.
Midcap maven
There's also opportunity among so-called midcaps -- stocks of medium-size companies. The price-earnings ratios of midsize growth companies are now lower, on average, than those of rapidly growing small companies, while earnings prospects for small and midsize firms are roughly equal. What's more, as the economy continues to expand, stocks of midsize companies tend to outpace those of smaller ones.
Few funds mine midcaps better than Meridian Growth (MERDX; 800-446-6662). Over the past 20 years, Meridian returned an annualized 14% under manager Richard Aster, placing it 15th among diversified U.S. stock funds. At 64, Aster has been investing for a living for 35 years -- and he shows no signs of slowing down. Meridian gained an annualized 15% over the past five years, placing it in the top 10% of funds that specialize in fast-growing midsize companies.
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