Growth stocks are in favor now but record highs on the major market indices make growth investing an increasingly risky game. But some growth funds have a healthy balance of stocks with growing earnings but reasonable prices. These are funds that focus on “growth at a reasonable price,” or GARP for short.
The best GARP funds will hold stocks of companies that are expected to grow at a rate faster in relation to the overall stock market. However, these growth stocks will typically have some value aspect, such as lower prices in relation to other growth stocks or for growth stocks that are just temporarily out of favor and expected to return to their winning ways again in the near term.
Therefore investors who want the best funds with growth qualities but with less of the downside risk of a pure growth objective, GARP funds can be a good fit.
Here are three of the best GARP funds to buy now.
Best Funds for GARP: Fidelity Contrafund (FCNTX)
The best GARP funds will be led by the best fund managers and Fidelity Contrafund Fund (FCNTX) is proof.
At the helm of Contrafund for 24 years, Will Danoff achieves GARP status by investing in companies whose value he believes have not been fully recognized by the market.
Current top holdings include Berkshire Hathaway Inc (BRK.B), Google Inc (GOOG) and Apple Inc. (AAPL).
While it typically lags more aggressive funds in surging markets such as 2009 and 2013, the fund’s ability to hold up better during market pullbacks has made it easier for investors to own than more volatile options, leading to reasonably good dollar-weighted returns.
Performance highlights include a five-year rank in the top half of large growth funds and 10- and 15-year ranks that are in the top 10%.
The expense ratio is a reasonable 0.66% and the initial investment minimum is $2,500.
Best Funds for GARP: Parnassus Fund (PARNX)
Another well-managed GARP fund is Parnassus Fund (PARNX). Like Contrafund, PARNX primarily consists of quality growth stocks that are unloved by the investment community and thus are often undervalued.
The lead manager, Jerome Dodson, is the founder and president of Parnassus Investments and has been at the helm of PARNX for 30 years.
Top holdings include large-cap stocks like Applied Materials Inc (AMAT), but the fund also holds mid-cap companies like Whole Foods Market, Inc. (WFM) and even small-cap stocks like Ciena Corporation (CIEN).
Performance ranks for one-, three-, five- and 10-year returns range from top third to top 10% compared to other large growth funds.
The expense ratio for PARNX is comfortably below average at 0.86%, and you can get into the fund with an initial purchase minimum of $2,000.
Best Funds for GARP: iShares Russell 1000 Growth (IWF)
It may sound counterintuitive to invest in an index fund to capture the GARP strategy performance, but the iShares Russell 1000 Growth Index (ETF) (IWF) offers a broad and passive portfolio of large-cap growth stocks that has an average price-to-earnings ratio lower than the average large growth fund. Combined with low expenses, investors can accomplish the GARP objective without the manager risk associated with actively-managed funds.
A typical GARP investor will be interested in finding the best funds that can beat the S&P 500 in the forthcoming market environment. So when an investor believes growth stocks will outperform value stocks, they can consider a low-cost index fund that tracks the Russell 1000 Growth Index.
For example in 2007, near the end of the previous bull market, IWF had a price gain of 11.6%, whereas the S&P 500 was up 5.5%. Similarly, in the recovery of 2009, IWF jumped 36.7% and the S&P 500 gained 26.5% in price.
As for the “reasonable price” aspect of this growth fund, IWF has a forward price-to-earnings ratio of 19.9, while the average large growth fund’s P/E is at 20.4, so it’s trading at a slight discount.
Rounding out IWF’s attractive features, the expense ratio is a cheap 0.2%.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.
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