The Hottest Funds for 2012

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In this three-part articles series, we're taking a look at some first-rate actively managed mutual funds that are set to light up the scene in 2012. I've zeroed in on domestic large-cap funds, given their generally more favorable valuations as compared to small-cap stocks and funds. In Part 1 of the series, I highlighted two winning dividend-focused funds that investors might want to examine more closely. Today I'll shine a spotlight on two large-cap value funds that should do well in the coming year.

Yacktman (YACKX)
It's not every fund that can manage to end up in the top 1% of its peer group over the most recent three-, five-, 10-, and 15-year trailing time periods, but Yacktman is one fund that has done just that. Superior stock picking, and a willingness to hold a lot of cash at opportune times, has vaunted the fund to one of the best track records in the large-cap value fund category.

Lead manager Don Yacktman tends to favor high-quality industry leaders with ample cash flow and favorable valuations, with his current favorite picks including Procter & Gamble (NYS: PG) , Microsoft (NAS: MSFT) , and Coca-Cola (NYS: KO) . While financially stable blue chips like these are the mainstay of the portfolio, the fund also has the freedom to pick up a few smaller, cyclical plays like Janus Capital Group (NYS: JNS) .

Yacktman isn't afraid to make big bets; in fact, this fund is fairly concentrated. With only about 40 stocks in the portfolio and the top 10 holdings accounting for nearly 54% of fund assets, there's not a lot of room for error here. But since management generally avoids more speculative fare and only buys companies trading at a substantial discount to intrinsic value, the portfolio isn't a terribly risky one.

Of course, as with all concentrated funds, there's a risk that the stock picking could turn south and weigh negatively on the fund. And odds are good that Yacktman won't always look quite as good as it does now. But with an annualized 9% return over the past decade and a half, the fund has proven it can deliver over the long run.

Yacktman's value-oriented nature and focus on safety means that it generally performs well in market downturns, as it did in 2008 when it beat the S&P 500 index by nearly 11 percentage points, making it a good complement for racier large-cap fund options. In addition, its concentrated nature means that you'll probably want a more diversified value option, such as a value-oriented index fund, alongside it in your portfolio. Its heavy sector and position concentrations may not appeal to everyone, but Yacktman is a solid, conservative value offering that should provide a wide margin of safety in what promises to be a challenging market environment moving into 2012.

Dodge & Cox Stock (DODGX)
Personally, I think the investment team at Dodge & Cox is one of the best in the business. The firm has honed its value-oriented investment process over several decades and has amassed one of the better track records around along the way. Management is on the hunt for stocks that they feel represent excellent bargains at their current valuations.

The team isn't afraid to be contrarian at times, moving into corners of the market that other investors have shunned. Of course, the timing of these contrarian moves hasn't always been perfect, as evidenced by the fund's lagging performance this year, thanks in part to the portfolio's large stake in the flailing financial sector, including Bank of New York Mellon (NYS: BK) and Goldman Sachs (NYS: GS) , both of which have seen their value drop by a third or more this year.

And while the folks at Dodge & Cox have had more of a mixed near-term track record, don't mistake this stumble for a serious problem. Management has a habit of sticking to its guns, even if its investment approach is temporarily out of favor in the marketplace. Looking over the longer-term picture, Dodge & Cox Stock ranks ahead of 94% of all large-cap value funds over the most recent 15-year time period. In that time, it has racked up an annualized 7.7% return, versus a 5.3% showing for the S&P 500 index. By its very nature, the fund won't always move with the markets, so investors need to be able to sit tight through these periods of divergence.

Right now, the fund is pretty heavily invested in the health-care sector, and its holdings include several big-name pharmaceutical companies including Pfizer (NYS: PFE) , which has generated a nice gain for the portfolio in 2011. This positioning should benefit the fund as health care-related spending continues to rise in the coming quarters.

A very low 0.52% price of admission and reasonable 12% annual turnover further add to the fund's appeal. Its time-tested valuation-conscious approach and contrarian leanings make Dodge & Cox Stock an excellent core value option for nearly any investor.

Stay tuned tomorrow for the final installment of our look at the best large-cap funds for 2012. We'll close out our evaluation process with a look at two of the hottest growth funds for the new year.

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At the time this article was published Amanda Kishis the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. Amanda owns shares of Yacktman.The Motley Fool owns shares of Microsoft and Coca-Cola.Motley Fool newsletter serviceshave recommended buying shares of Procter & Gamble, Microsoft, Coca-Cola, Goldman Sachs, and Pfizer, as well as creating a bull call spread position in Microsoft. Tryany of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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