The Value Line Mutual Fund Survey

Short-List Picks: Large-Cap Value

For most of the first quarter of 2009, the stock market remained volatile as the unemployment rate increased and investor sentiment remained negative. During the month of March, the stock market rebounded with help from government bailouts while key interest rates remained low. In April, the economy appeared to stabilize with manufacturing showing signs of improvement. However, in May the unemployment rate remained high, and retail sales dropped as a result. Also, the number of mortgage applications decreased about 16% (according to the Mortgage Bankers Association). For the month of May, the Russell 1000 Value Index, a benchmark that measures the performance of large-cap value stocks, reported a total return of 6%, while the Russell 1000 Growth Index that follows large-cap growth stocks posted nearly 5%. Value stocks appear to have finally pulled ahead of growth stocks after months of lackluster performance, an odd occurrence, especially during a recession. This month, we will take a look at a few mutual funds within the large-cap value realm.

Vanguard Windsor-I Fund (VWNDX) is part of the high-risk section of the Large-Cap Value model portfolio. The fund seeks to achieve the objective of long-term capital appreciation and income. Management attempts to achieve this goal by investing primarily in large- and mid-cap companies that it believes are trading at an undervalued price compared to its intrinsic value. The fund has three investment advisors that independently select stocks for the portfolio. Wellington Management Company, LLP manages 65% of the fund’s assets. Wellington’s portion of the portfolio generally consists of companies that offer prospective growth of earnings and dividend yields. AllianceBernstein L.P. is in charge of 35% of the fund’s assets. AllianceBernstein uses both fundamental and quantitative research in order to find undervalued stocks. It employs strict controls to create a portfolio that has return expectations that can be compared with the Russell 1000 Value Index. The Vanguard advisor manages 2% of the fund’s assets to facilitate cash flows between the fund advisors. Vanguard advisors tend to invest in stock futures and/or shares of exchange-traded funds. The fund is actively managed and therefore may buy and sell stocks after examining a company.

For the January to April period, the fund posted a total return of nearly 2%, outperforming the Large-Cap Value peer objective group by 5%. Its annualized total returns over the trailing five-, 10-, and 20- year periods have bested the total returns of the peer objective group, as well. However, its level of volatility is above the peer objective group’s average. Investors interested in this fund may get the latest information about this fund by calling (877) 662-7447 or visiting the Web site www.vanguard.com.

In the moderate-risk section of the model portfolio is Gabelli Asset Fund (GABAX). The fund’s primary objective is growth of capital, with current income a secondary consideration. Management attempts to achieve this goal by investing at least 80% of assets in common stocks, preferred stocks, and securities that may be converted into common stocks. When selecting securities for the portfolio, management focuses on such factors as earnings expectations, earnings and price histories, balance sheet characteristics, and a company’s management skills. The fund strives to earn 10% of the real rate of return. Up to 25% of its assets may be invested in foreign companies.

The fund’s total return has outperformed the Large-Cap Value peer objective group by nearly 3% in the year-to-date period through April. It has a good historical performance record, too. Its annualized total return has outperformed both the peer objective group and the S&P 500 Index over the trailing three-, five-, 10-, and 20- year periods. Also, it received Value Line’s Overall Rank of 2. Its level of volatility is above the peer objective group’s average. To obtain a prospectus about this fund, call (800) 422-3554, or visit the Web site www.gabelli.com.

In the low-risk section of the Large-Cap Value model portfolio is Tocqueville Fund (TOCQX). The fund seeks to achieve the objective of long-term capital appreciation. In pursuance of this goal, management primarily invests in domestic common stocks. Investments in the stocks of foreign companies may also be made. When selecting stocks for the portfolio, management uses a valueoriented and contrarian investing style. Management evaluates potential candidates to see if they have good longterm fundamentals. It tends to focus on a company’s historical and projected cash flow, book earnings, and net asset value. The other corporate characteristics that management may consider include strong management, business franchise, competitive position, and financial structure. Then, management will invest in companies that are trading at a discount compared to its intrinsic value. Management will sell a stock if the value has declined or has lagged the relevant market index for an extended period of time.

The fund has performed well thus far, as reflected when it outperformed the Large- Cap Value peer objective group by three percentage points for the four-month period through April. Also, the fund’s annualized total returns have outperformed its peer objective group over the trailing three-, five-, 10-, and 20-year periods. The fund also received Value Line’s second-highest overall rank. Its level of volatility is roughly in line with the peer objective group’s average. For more information about this fund, call (800) 697-3863 or visit the Web site www.tocquevillefunds.com.

Investors who would like to invest in an exchange-traded fund (ETF) may want to look into streetTRACKS DJ Wilshire Large Cap Value Fund (ELV). It is an appropriate ETF for this asset class, and offers broad exposure to large-cap value stocks. To learn more about this offering, visit www.amex.com.