5 good bets for a growth rally

By Morningstar

After several years in the hole, followed by a couple more in the shadows of value offerings, growth funds are finally having their day in the sun. Several factors have come together to benefit growth funds. Most have dodged the market's big trouble spot this year: financial stocks. The subprime crisis and liquidity crunch have weighed on many financial firms, and the companies most affected are more common to value portfolios.

Meanwhile, growth offerings have been carried forward by highfliers such as Google (GOOG, news, msgs) and Apple (AAPL, news, msgs), which continue to surprise Wall Street with their innovation and earnings growth. The Federal Reserve's half-point interest-rate cut in September helped fuel gains, too, as investors seem to be expecting an economic slowdown (in which case firms that can grow their earnings more rapidly than the broad economy look more attractive).

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And valuations in the market haven't been frothy, bringing several growth stocks well into reasonably priced territory, thereby making them attractive to a wider subset of investors. More traditional growth stocks, especially large caps, are now seen as anchors of relative stability.

An overdue comeback

The comeback is overdue, and the reasons for it make sense. However, the reason to own a growth fund is not the hot performance of the past year. Nor is a sustained growth rally a sure thing. Rather, we think a solid growth fund can help anchor a well-diversified portfolio. By mixing investment styles, investors are more likely to experience a balanced outcome and less likely to miss out on a hot spot and be tempted to jump in at the tail end of a rally.

So, now may be a good time to take a harder look at your growth exposure. Yet, we caution that a fund's recent performance isn't enough to make any growth fund attractive. Many charge too much, have unproven management and don't have superior processes that are repeatable. And it's worth noting that some rallying stocks such as Google, Cisco Systems (CSCO, news, msgs) and Apple are widely owned and thus have helped lift most boats. Thus, this year's performance on its face is not indicative of true unique skill.

Here's a list of large-growth funds on fire this year but that also have longer-lasting potential. We think each of these funds has a capable management team, uses a solid process and offers a good value proposition to investors. We've listed funds from least to most aggressive.

Aston/Montag & Caldwell Growth

Year-to-date return (through Oct. 16): 21.2%, expense ratio: 1.06%

Several years of lackluster relative returns were starting to weigh on the long-term record of the Aston/Montag & Caldwell Growth (MCGFX) fund, disguising its potential. This high-quality, valuation-conscious growth portfolio has always tended to do well in times of uncertainty. Yet it's not a one-trick pony that only works in uncertain markets. The team has made lots of money over the years with household names such as Coca-Cola (KO, news, msgs), Procter & Gamble (PG, news, msgs) and General Electric (GE, news, msgs).

Management is seasoned, steeps itself in stock-level research and has the temperament and patience to be unique and get ahead.

T. Rowe Price New America Growth

Year-to-date return (through Oct. 16): 18.6%, expense ratio: 0.89%

T. Rowe Price New America Growth (PRWAX) Manager Joe Milano has proved himself a skilled investor during the five years he's managed this fund. Like other managers at T. Rowe, he benefits from strong research and investment ideas that come from T. Rowe's strong central analyst team.

He distinguishes this fund from other large-growth funds at T. Rowe and rival firms by devoting a large slice of the portfolio to midcaps. That could hold the fund back in a megacap-dominated market, but we think it will be additive over time.

Continued: 3 more to consider

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