The Best Large-Cap Funds for 2011

01/13/2011 1:00 pm EST

Focus: FUNDS

Russel Kinnel

Editor, Morningstar FundInvestor

This foursome is poised to deliver superior returns on high-quality stocks, writes Russel Kinnel in Morningstar FundInvestor.

A decade of paltry returns has made large caps unusually cheap. I said this last year, and they did pretty well, but they’re still cheap. Our dividend experts say a wave of dividend hikes could be on the way in 2011, and that could be the catalyst that spurs them higher. In addition, some of that money will go to stock buybacks. If not, that just will provide more time to get them at reasonable prices. Here are some of my favorite ways to play high-quality stocks:

Dreyfus Appreciation (DGAGX)
It’s funny to hear newsletters that recommend rapid ETF trades also claim to be on the side of passive investing, while very low turnover funds like this one are on the side of active investing. This fund has single-digit turnover and is incredibly dependable. That keeps costs and drama down. The fund is sub-advised by Houston stalwart Fayez Sarofim. Every once in a while this fund is in the market’s sweet spot as its blue-chip names look cheap. This is one of those times.

Sequoia (SEQUX)
This fund is more focused than Dreyfus Appreciation and more willing to buy smaller companies, but the portfolios do have a common blue-chip focus. I love the fact that this fund’s 25 years of being closed to new investors has left it with a very modest asset base so that Managers of the Year Bob Goldfarb and David Poppe can invest exactly as they like. You can buy it through Vanguard for a fee or directly for no fee.

Primecap Odyssey Stock (POSKX)
The best growth managers (Joel Fried, Howard Schow, and Theo Kolokotrones) are running one of their smaller portfolios. That means they can move a little more quickly on stocks than in some other funds. In all their funds, they look for strong secular growth stories at reasonable prices. In 2010, their hefty health-care portfolio hurt returns, but the long-term record is strong, and I’m not worried.

Vanguard Dividend Growth (VDIGX)
At the risk of being too literal, one way to play dividend growth is a dividend-growth fund like this gem run by Wellington. Manager Donald Kilbride has done a fine job of finding good companies with the potential to grow their dividends. He’s produced top 5% returns since taking the helm in 2006 without taking on big risks.

[Kinnel recently recommended a micro-cap fund that’s waived its expenses as well as an emerging Asia offering that’s left most rivals in the dust—Editor.]

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