The Year’s Hottest Investments: Large-Cap Edition

Each year, Kiplinger's Personal Finance releases its list of top-performing mutual funds in 11 different categories. And while Foolish investors know that past performance isn't the only thing that should be considered when buying a fund, past results do give us a clue as to how the fund may perform in the future. In this three-part series, I’ll look at Kiplinger's best-performing funds in three popular asset class categories and parse out which funds investors might want to consider buying and which ones they might want to stay away from. First up: large-cap funds.

Best of the best
From Kiplinger's, here are the 10 top-performing funds in the large-cap category over the past 10 years (through July 31, 2011):

Source: Kiplinger's.

And while I always encourage investors to judge funds by their long-term returns rather than short-term results, you need to look beyond simple returns to get a better idea of whether a fund is worth buying.

Green light ahead
The father-and-son stock-picking duo of Donald and Stephen Yacktman has racked up a truly impressive track record over the past decade at Yacktman and the similarly managed Yacktman Focused. In the past, a cautious value orientation led the fund to do extremely well in down markets but lag in bull markets. However, some excellent stock picking after 2008's market crash vaulted the Yacktman fund to a 59% gain in 2009's speculative market. The team won big on picks like media firm Viacom (NYSE: VIA-B) and retailer Williams-Sonoma (NYSE: WSM), which gained roughly 68% and 178%, respectively, on the year. While investors shouldn't expect the fund to post that kind of performance going forward, both Yacktman funds are excellent choices for core large-cap value exposure.

Fairholme's stellar long-term track record hides its more recent troubles. Manager Bruce Berkowitz made a big bet on troubled financials after the sector got battered in 2008. He loaded up on beaten-down names like American International Group (NYSE: AIG), Bank of America (NYSE: BAC), and Citigroup (NYSE: C). As financials have stumbled again in recent months, Fairholme finds itself in the basement of its peer group over the past one-year period. While fair-weather fund-holders are fleeing the scene, I urge investors to sit tight. Berkowitz has a long history of making timely calls on the market, and he’s one of the best stock pickers in the business.

As a fund shop, Fidelity is known for having a consistent revolving door when it comes to its fund managers. Most of them don’t stay put for too long. One exception to this rule is the tenure of Will Danoff, manager of Fidelity Contrafund. Danoff has been on board here for more than two decades. In that time, Danoff has beaten the vast majority of other large-growth funds on the market. Current top picks Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) are both reasonably priced tech market leaders with considerable growth opportunities ahead of them, which should leave ample room for the fund to continue to appreciate. With a reasonable 0.92% price tag and a well-diversified portfolio, this fund is suitable for growth investors of all stripes.

Amana Growth and Amana Income are socially screened funds designed for Muslim investors. The team seeks to invest in accordance with Islamic law, which means they can’t buy companies that derive revenues from tobacco, alcohol, gambling, pork, pornography, or lending money. This means financials are off-limits to the funds, which helped them avoid the worst of 2008’s downturn. So a big part of these funds’ outperformance in relation to the market over the past decade was a result of this positioning. But even without 2008 in the mix, management has a solid track record of good stock picking. Extraordinarily low turnover and low initial investment minimums make these funds appropriate for a wide range of investors, even those who aren’t seeking to invest in accordance with Islamic principles.

Keep on walking
While ICON Materials has certainly performed well, thanks to the run-up in commodity prices and accompanying boost to company stock prices in the industrial and basic materials sectors, investors might want to pass on this one. In general, I recommend investors avoid sector-focused funds because they usually buy and sell them at exactly the wrong times. In addition, this fund isn’t cheap at 1.38%, and it got a new manager at the start of 2007, so its track record prior to that isn’t that relevant anymore. All in all, there are better, more broad-based options out there.

I’m also somewhat conflicted about CGM Focus. While the fund is run by an undeniably talented manager with a long history of smart stock calls, its extreme volatility makes it a hard fund to own. While the fund still ranks in the top 1% of its peer group over the past 10-year period, it also ranks in the bottom 1% over the most recent three-year period. Turnover is incredibly high, at 363% a year, making it difficult to own in taxable accounts. If you can live with extreme highs and lows, this fund could still be a long-term winner for you. Ken Heebner is a talented manager, and has proven he can deliver. But most investors don’t have the patience to sit through such a roller-coaster ride, so to avoid the urge to buy and sell at the wrong times, it’s probably better to look elsewhere.

And while GAMCO Westwood Income AAA also has some solid performance at its back, it’s also pretty expensive, with a 1.50% price tag, according to Morningstar. In addition, there was a management change back in mid-2007, when the investment management function moved from the team at Westwood Management to the team at Gabelli Funds. Performance since then hasn’t been that impressive, slightly lagging the S&P 500 Index. This fund is fundamentally different from what it was a decade ago, so I’d recommend investors look to other options in this space.

Lastly, Columbia Strategic Investor has a solid 10-year track record, but investors should realize that this fund has also changed a lot over the years, moving from the mid-cap style box into the large-cap arena. This fund has an all-cap mandate, which means that it can range all over the market cap spectrum. Over the past decade, the fund’s significant small- and mid-cap exposure gave it a hefty boost over dedicated large-cap funds. As small caps roared, the fund outperformed. The fund’s exposure to emerging markets also gave it a boost over its rivals as that sector soared in recent years. So much of its outperformance has simply been attributed to the fact that it had the flexibility to move outside the typical large-cap box. That’s not a bad thing, but it does give the fund a bit of a leg up on its more boxed-in competition.

However, it’s primarily the fund’s 5.75% front-end load that keeps me from endorsing it. If you can get access to the fund in a retirement plan where you can avoid this load, it could be a decent fund to own. But if you can’t avoid paying that fee, there are better choices for large-cap investors.

Stay tuned for tomorrow’s look at the best-performing small-cap funds of the past decade.

For more winning mutual fund recommendations and time-tested personal financial planning advice, check out the Fool's Rule Your Retirement service. You can start your free 30-day trial today.