In the investing world, big-name money managers frequently end up with the lion's share of assets; after all, everyone has heard of Vanguard, Fidelity, and T. Rowe Price. But investors shouldn't forget about smaller, more off-the-radar fund shops. While a hefty asset load can weigh down a fund and cause a drag on performance, even for large-cap-focused funds, funds that have yet to see major inflows can remain nimble and better able to take advantage of special situations.
With that in mind, I've identified two first-rate large-cap funds with total assets of less than $500 million. If you're looking for an investment that everyone else hasn't already discovered, take a minute to check out these two winners.
LKCM Equity (LKEQX)
While this fund lands squarely in the large-cap fund category, it actually takes an all-cap approach to investing, picking up mid- and small-cap names if attractive opportunities arise. While larger names are the focus here, the fund's average market capitalization is just $18 billion, much less than the $63 billion of the average large-cap blend fund.
LKCM founder Luther King has headed up efforts here since the fund's 1995 inception. He is assisted by three other PMs who have been with the fund since mid-2010. With just over $100 million in net assets, this fund has a lot of room to maneuver and grow down the road.
King and his team look for companies with above-average revenue and earnings growth, above-average return on shareholder equity, and a lack of dangerous leverage. The focus here is on best-in-class market leaders from many different corners of the market. Blue-chip names like Procter & Gamble, IBM, and ExxonMobil make an appearance in the fund's top holdings, thanks to their healthy balance sheets, consistent revenue growth, and industry-leading positions. However, mid- and small-cap names are included as well, to the tune of 43% of fund assets. Low 23% annual turnover indicates that the approach here is solidly focused on the long run, rather than on chasing short-term fads.
The fund's investment process leans somewhat conservative, allowing management to build a portfolio that holds up better than its peers in market downturns. For example, while the fund lost 31.8% in 2008, it beat the S&P 500 Index by more than 5 percentage points that year and the average large-cap blend fund by 6 percentage points. Over the most recent 15-year trailing time period, LKCM Equity has turned out a 6.4% annualized return, compared to 5.4% for the S&P 500 and 5.3% for the average large-cap blend fund. With a low 0.81% expense ratio and a newly lowered investment minimum of $2,000, LKCM is a solid option for folks seeking a relatively undiscovered large-cap fund.
Buffalo Growth (BUFGX)
Over at Buffalo Growth, management combines top-down macroeconomic analysis with bottom-up stock selection to identify rapidly growing companies that are selling at a discount, often due to temporary setbacks. While the focus is on domestic names, there's an added kick here -- to make the cut into the fund, a company must derive a portion of its revenues from overseas. Therefore, the resulting portfolio offers the benefits of foreign market exposure while limiting the risks involved with a direct international allocation.
Similar to LKCM Equity, while the primary focus is on large-cap names, roughly one-third of fund assets are currently dedicated to mid- and small-cap names. On the large-cap side, the portfolio leans heavily into typical market-leading growth stocks such as Apple and Google. These names are a perfect fit for management's criterion for high returns on invested capital. The fact that the fund has utilized the same investment approach since its 1995 inception with great success through a variety of market environments signals that it should be able to continue to produce market-beating returns going forward.
While Buffalo Growth sports a growth profile, the fund takes a somewhat moderate approach, meaning that it won't do as well as high-octane growth funds in years when that investing style is in favor, but it should also do better in more subdued markets. Over the past 15-year period, the fund has returned an annualized 6.7%, better than 85% of all large-cap growth funds. At last glance, the fund only has $445 million in assets to its name, so there's still plenty of room for future growth, here. Buffalo Growth does tend to make heavy bets in certain sectors, notably information technology, so there's a potential for some volatility. However, its long track record of success, long-tenured management, and reasonable 1.00% price tag make it a great choice for growth investors willing to sit through a few bumps in the road.
When making your investment selections, remember that big-name funds aren't the only ones that can get the job done. Sometimes smaller funds that haven't yet attracted a lot of assets are a better bet. So don't forget to look beyond the big names to find those hidden gems.
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