Big-cap mutual funds push growth stocks aside

NEW YORK — For mutual fund investors, 2006 was a year to sink cash into some of Wall Street's lumbering giants and shy away from the kind of glitzy stocks that fueled the dot-com boom. And the strategy paid off.

Investors fled to more stable investments last year, worried that the wind might get knocked out of the record stock market run. Looking to protect value, portfolio managers realized that they'd find the greatest returns from funds that focus on blue chips, and also from funds filled with dividend-paying companies.

These investments are known for slow growth, but in 2006 they outpaced the Standard & Poor's 500. Funds that track high-growth industries such as technology languished.

"People were looking forward in case there's a slowing economy or a slowing market," said Jeff Tjornehoj, a senior research analyst with mutual funds watcher Lipper. "There's a building consensus that large caps should take the leadership from small-and-mid caps sometime soon; a slower economy just bodes well for the group."

As of Dec. 28, the 7,865 U.S. diversified equity funds — which have $3.74 trillion in assets — had an average return of 12.90 percent, according to Lipper. This was below the 14 percent increase in the S&P 500 index for the same period.

It was also well below the 16.3 percent return in the S&P 500 total return index, a benchmark used by the industry because it includes dividend appreciation. The Dow Jones industrials, which tracks 30 of the nation's biggest stocks, rose 16.6 percent as of Dec. 28.

However, value funds made up of conservative, stable companies outperformed major indexes last year. For instance, large-cap value funds returned 18.55 percent during 2006, and multi-cap value funds returned 18.05 percent. Even large-cap core funds — a blend of mostly large caps and some companies deemed undervalued — returned 14.11 percent.

The biggest returns in 2006 came from equity income funds, which comprise companies known for paying dividends. They returned 18.94 percent, according to Lipper.

Traditionally, this group is known for its ability to protect investors from volatility. The dividend, in a sense, acts as an anchor that makes sure the value neither gets too high nor too low.

But it's little wonder dividend-paying companies fared so well last year. S&P 500 companies had stockpiled more than $650 billion of cash going into 2006 thanks to record double-digit earnings during the past few years. Dividends rose about 12 percent from 2006 for the 383 companies that pay them, according to S&P.

"Investors turn to dividends for a more conservative approach, and that's exactly what they were looking for (in 2006)," said S&P's senior index analyst Howard Silverblatt.