Mutual Fund Site

A common request we receive at the Mutual Fund Site is one concerning value funds. And realistically, value investment funds offer an added cushion to the potential for long-term capital appreciation; cheap equity prices. Arguably the biggest challenge facing value investors concerns safety of capital, something that is never guaranteed but should at the very least be somewhat managed within a portfolio.

At this phase in the market recovery, our bias leans toward large cap domestic equities and this bias reflects in our choice of the Franklin Growth Fund as a our top mutual fund pick for 2011. While the Franklin Growth Fund belongs to the large cap growth funds family, there are several large cap, domestic investment funds that take an value investment approach to their portfolio.

In our ongoing search to improve our database of funds covered at the Site, we came across the American Funds American Mutual Fund (AMRMX), a large cap value fund based on its latest portfolio snapshot. With a low-risk, above-average profile, this 4-star fund was not quite a top performer in 2010 with its calendar year return of 12.23% just 2.84% below the S&P 500. However, there are some special attributes to this fund that make it worthwhile for conservative investors: its underlying holdings.

A Value Fund To Make Your Happy… Always

In speaking of returns, the American Funds American Mutual Fund is a value fund that really distills the risk that is commonly associated with this investment style. While investors saw returns that trailed the S&P 500 last year, overall the fund will perform well in good times and preserve capital better than the Index and its peer group average in bad times. Often, this is more than enough to keep the most anxious investor happy.

Take 2008 when the S&P 500 lost 37%; this value fund lost just 30%. And compare that to its peer group average loss of 37.09%. Another bad year was 2002 when the S&P 500 lost 22.1% and the peer group lost 18.69%; this fund lost just 12.18%. Indeed, these are losses. But in good years, the fund keeps returns respectable and in the green.

In the 2009 market rally, this value investment fund returned 25.43%. Not bad, but not quite the 26.46% returned by the S&P 500 (it beat its peer group average this particular year). And in the 2003 market rally when the S&P 500 returned 28.68% and the peer group returned 28.44%, this fund returned a still-respectable 23.32%. Overall, returns are handsome when markets rally as well.

Top Holdings That Offer The Best of Both Worlds

We mentioned earlier that we favor a large cap growth investment style heading into 2011. Stubborn as we are, this is unlikely to change throughout the year (but of course, we may change our tune depending on market conditions and perceived risks). However, this value fund offers a lot of what we would recommend to growth-oriented investors as well. In its top holdings, expect to find solid security holdings that pay dividends, offer tremendous growth potential and meet value investment criteria.

AT&T at 4.31% of holdings, P/E Ratio of 8.1

As the leading telecommunication provider in the United States, AT&T has several key advantages over fierce competitors like Verizon; The Apple iPhone. With a strong subscriber base, AT&T does have a bit of an edge, but it will require some aggressive investment in its infrastructure in order to remain competitive and maintain customer service levels with their service. At a P/E ratio of just 8.1, this security is a bargain by anyone’s standards. Add an aggressive dividend yield above 6% and it is easy to see why this security finds itself as this value fund’s top holding.

Merck & Co. Inc. at 3.5% of holdings, P/E Ratio of 14.37

Merck is well known as one of the pharmaceutical leaders in the world, having profited from the Singulair product the patent of which has expired. While there are other patents expiring in the near future, resulting in fairly substantial analyst concern and scrutiny, the company’s purchase of Schering-Plough is seen as a defensive strategy that will allow some of the run-off in sales from its patents to be more than offset. Like AT&T, Merck’s handsome dividend yield of more than 4% is another encouraging reason to find it among this value fund’s Top Holdings.

Microsoft Corp at 2.68$ of holdings, P/E Ratio of 12.3

Love or hate its operating system, Microsoft is a software leader. While there may have been what seemed like a lack of focus since Gates’ departure, rest assured that this company is very focused today. This focus has translated into a Search Engine (Bing) that has done what Yahoo! has failed to do for over a decade — it has stolen market share from Google. And with smarter, more robust software, Microsoft is making simpler what other companies are spending billions on; cloud computing. With increasing dividend yields, Microsoft is a staple of any strong portfolio, so it makes sense to find it here. We are evidently bullish on Microsoft and expect to find good performance at reasonable to low risk.

Who Should Own This Value Fund?

Investors who may not agree with our large cap growth philosophy for the year and prefer an alternative option would not be unwise to stick to the large cap category. As Ken Fisher confirmed in a Bloomberg piece, the largest US companies stand to be the benefactors of a strong economy and market in 2011. So let’s not stray too far from the Large Cap category. Instead, consider an alternative investment style. The American Funds American Mutual fund fits the bill nicely and without taking on substantial risk.

With a strong line of top holdings, the American Funds American Mutual Fund is one of the most solid value mutual funds out there and is worthy of serious consideration for those who crave a good value play.