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Whatever your investing style, there's probably a mutual fund for you — whether it's small-cap growth stocks or large-cap value. But some funds venture beyond these traditional style boxes. And while these multi-cap funds are a bit unconventional, they may offer benefits for long-term investors.
More than 2,800 multi-cap funds are on the market, according to Lipper, and they take a free-range approach to stock picking. If large-cap stocks look cheap, the managers can emphasize big-name companies. If they see better bargains in smaller or mid-sized firms, they can invest more heavily there.
These funds can make sense for investors who aren't certain which area of the market looks most attractive, says Tom Roseen, head of research services for Lipper. The managers of these funds don't always pick the best spots, of course, but they don't have to stay boxed in either.
"When we find a winning company we stick with it," says Stephen Grant, manager of the Value Line Premier Growth Fund (VALSX), a top-rated multi-cap fund. "We're much less concerned with the market value."
Over the last three years, "core" multi-cap funds returned an average 10.8% a year, slightly beating large-cap funds, according to Lipper. Multi-cap funds also beat large-cap funds over the last five years with a 5.25% average return versus 4.75% for large caps.
Like any stock investments, multi-cap funds may not be suitable for everyone. Many of these funds hold smaller stocks that tend to be riskier than larger companies, notes Roseen. In bear markets, smaller stocks usually fall more than larger companies, potentially dragging down the funds' returns.
Yet multi-cap funds can offer advantages, says Derek Tharp, a financial planner with Mote Wealth Management in Cedar Rapids, Iowa. With their all-in-one approach, the funds are more efficient than owning a smattering of large, small- or mid-cap funds. They can cut trading costs for an investor who might otherwise buy and sell several funds to keep her investment mix intact. And the funds can be tax-efficient if they use a buy-and-hold strategy and don't trade excessively.
If you're going to use a multi-cap fund, though, check the fit with your other investments. It's quite possible that a multi-cap fund will overlap with your other funds, notes Roseen, since multi-cap managers have broad leeway to invest. If you own other small-cap funds, for example, a multi-cap fund may increase your overall exposure to smaller stocks above where you're comfortable.
To find compelling funds, we asked Lipper to screen for no-load multi-cap funds with three-year performance in the top 20% of the category, expense ratios below 1.5% and consistent returns. These five funds passed the test. You should do your own research or consult an adviser before investing.
Founded in 1969, the Nicholas Fund (NICSX) has survived everything from the bear market of the 1970s to the dot-com crash of 2000. Though the fund has taken its lumps, it has returned an average 10.6% a year since inception and racked up strong gains recently, beating 97% of rivals over the last five years with a 10.9% average return, according to Morningstar.
Based in Milwaukee, the fund holds about 40 stocks from small companies such as Wisconsin-based tool maker Snap-On (SNA) to giants like MasterCard (MA) and Walgreen (WAG). "We're stock pickers and go wherever we can find attractive stocks," says fund founder Albert Nicholas, who runs the portfolio with his son, David.
While it's classified as a growth fund, Nicholas likes "value stocks with an emphasis on growth." He gravitates to stocks that pay dividends, have "enduring" business models, low debt and reasonable valuations. Those attributes provide a margin of safety, he says, and he prefers stocks with sustainable growth instead of more cyclical energy or materials companies.
The downside: While performance has been solid, the fund may lag in markets led by more growth-oriented, cyclical stocks. It costs $75 to buy shares on the Fidelity platform.
The managers of Artisan Global Opportunities (ARTRX) don't care where a company is headquartered if it looks like a solid growth business. The fund invests roughly 60% of its money in U.S. stocks such as Google (GOOG) and Discover Financial Services (DFS). The rest is in foreign stocks, including companies such as Hexagon (HXGBF), a Swedish industrial conglomerate, and Japanese robotics firm Fanuc (FANUY).
The common theme? Companies that combine strong businesses with "innovation and growth," says co-manager Matthew Kamm. "We're less focused on where company is domiciled than where it derives revenues and profits," he says.
Based in Milwaukee, the managers look for stocks trading at a discount to their estimate of the company's private market value, and they'll invest in companies valued anywhere from $3 billion to $200 billion. One lesser known name they hold: Rotork (RTOXF), a $3.8 billion British maker of "flow control" equipment for petrochemical plants and other industrial uses.
Since launching in late 2008, returns have been solid. The fund has gained an average 10.8% a year since inception, according to Artisan, more than double the 5.26% return of the MSCI All Country World Index.
While it's still a relatively young fund, it "boasts both an impressive pedigree and a fine record," Morningstar analyst Greg Carlson wrote in a recent report. The fund has been a consistent performer, capturing 116% of the market's gains in up months and 96% of the downside.
The downside: The fund's foreign stocks pose currency risk for U.S. investors and fees are slightly above average for the category, according to Morningstar.
Headquartered in St. Paul, Minn., Mairs & Power Growth Fund (MPGFX) doesn't stray far from its Midwestern base. Around 60% of the fund is in companies located in the upper Midwest, including Target (TGT), paint company Valspar (VAL) and 3M (MMM).
Why stick with Midwest companies? The region is home to many high-quality businesses and their geographic proximity is a benefit, says fund co-manager Mark Henneman. "We can get in the car and see their management teams, suppliers and customers first-hand," he says. "We get to know them really well."
Henneman and lead manager William Frels don't just stick with big-name companies. Around half of the $3 billion fund is in small and mid-sized stocks, including adhesives maker H.B. Fuller (FUL) and filtration company Donaldson (DCI). The managers also buy stocks for the long haul, intending to hold them for decades. Indeed, the portfolio's annual turnover is around 5%, says Henneman, though he does trim or expand positions as valuations change.
Overall, the "fund's long-term record is superb," notes Morningstar analyst David Falkof. The fund returned an average 9.8% over the last decade, beating 91% of peers, according to Morningstar. Over the last 15 years, the fund's 8.5% average return beat 98% of rivals.
The downside: Henneman says he would expect the fund to lag during strong bull markets and outperform when markets are flat or down. It costs $75 to buy shares on the Fidelity platform.
Stephen Grant doesn't pay much attention to the price-earnings ratio of a stock. If he finds a company that's growing consistently, has a strong brand and a high return on capital, he's likely to invest. These features help give companies "control over their destiny," says the manager of the Value Line Premier Growth Fund (VALSX), based in New York.
Holding around 200 stocks, the $360 million fund doesn't make big bets. No stock amounts to more than 2% of assets and the top 10 positions comprise just 12%. Though Grant owns shares in some large companies like MasterCard (MA), the portfolio is packed with mid-caps such as baked goods company Flowers Foods (FLO), drug maker Alexion Pharmaceuticals (ALXN) and waste disposal firm Stericycle (SRCL).
Grant views these mid-size stocks as his sweet spot. "They've had time to establish a solid record," he says, "yet they still have room to grow."
The fund has racked up a solid record too: Returns have averaged 11.2% a year over the last decade, beating two thirds of peers, according to Morningstar. Over the last 15 years, the fund's 8.4% average return beat 81% of rivals.
The downside: The fund won't be the "flashiest performer," says Grant, and returns may lag the market for long stretches. The fund has been slightly more volatile than the S&P 500 (.SPX) and its expense ratio is slightly above the category median, according to Morningstar.
Parnassus Mid-Cap Fund (PARMX) avoids the market's largest companies, looking for solid growth companies with market values from $3 billion to $20 billion. The portfolio's 39 stocks are a motley group: Holdings range from Teleflex (TFX), a medical products maker, to restaurant supplier Sysco (SYY) and natural gas company Questar (STR).
What ties it all together? Companies with "sustainable or widening" competitive advantages, says co-manager Matthew Gershuny. These "moats" help a company maintain its profitability and grow the business long-term. Top holding Waste Management (WM), for example, is one of the largest U.S. recyclers and landfill owners, he points out, and it's a growth business that's tough for competitors to crack.
Based in San Francisco, the fund may appeal to socially responsible investors: It screens companies for environmental, social and corporate governance factors, and it won't invest in industries such as tobacco, casinos or nuclear power. Those screens eliminate around 12% of stocks in the mid-cap universe, says Gershuny, leaving plenty of other opportunities.
Returns have averaged 9.6% over the last five years, beating 91% of rivals, according to Morningstar. Relative to the S&P 500, the fund has also fared well. It captured 109% of the market's gains over the last five years and 93% of its losses.
The downside: Mid-sized companies are generally riskier than larger ones and the fund may be volatile. With just $170 million in assets, the fund may be too small for some investors.
Daren Fonda is Senior Writer and Investing Columnist with Fidelity Interactive Content Services, a provider of objective investing content on Fidelity.com. He does not own any of the securities mentioned in this article.
Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.