Growth Funds Sport Attractive Holdings

by Alan Lavine and Gail Liberman

What's up with growth stock funds? On average they have lost over 40 percent the past two years.

Long term, however, their track record is as good as funds that buy undervalued stocks. Over the past 10 years, the funds have grown at a 11 percent annual rate.

Take the Janus 20 fund. The fund makes big bets on large company growth stocks. So its returns can soar or plunge. Long term, however, its return approaches the historical average return on the overall stock market.

Does that mean you should chuck that fund or any other growth stock fund you own? It's up to you. But take a look at what your growth stock fund owns. All right, these funds are volatile. Yes, you can lose your shirt. But look at the Janus 20 Fund. It has shown the ability to bounce back when growth stocks are in favor.

For example, after losing about -1.5 percent in 1992, 1993 and 1994--when value stocks were in favor--the fund gained 201 percent in the next five years, according to Morningstar Inc., Chicago. Then it gave back -65 percent in 2000 and 2001.

Now this is not an endorsement of the Janus 20 Fund. You could lose your shirt in bad years. Over the past two years, the fund lost 65 percent!

But if you can stomach the volatility, growth stock funds are good candidates for dollar cost averaging. You invest regularly and take advantage of the bad years to buy shares at lower prices. Later, when the fund rebounds, the average cost of your investment will be less than the market prices.

Janus 20 is more volatile than other growth stock funds because it makes big bets on a few stocks. The fund owns just 31 stocks. The average large company growth fund owns about 80 stocks, according to Morningstar. Largest holdings of all large company growth stock funds include: Microsoft, Pfizer, AOL Time Warner, Cisco Systems, GE, City Group, Intel, AIG, Home Depot, Wal-Mart, Johnson and Johnson, Tyco International, Amgen, Texas Instruments and Vertias Software.

Top-rated large company growth stock funds, according to Morningstar, include: Bramwell Growth, Brandywine Blue, Fidelity Growth Company, PBHG Large Cap Growth and Smith Barney Aggressive Growth.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show.

More articles by Al and Gail can be found here.