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By Katy Marquardt
Good mutual funds that had a bad year, and those that have simply lost their mojo
After spending much of last year in the doghouse, mutual fund managers have now had two quarters in 2009 to regain the faith of investors.
Many of last year's losers are now posting solid gains over the S&P 500, including heavyweights like Harry Lange's Fidelity Magellan and Bill Miller's Legg Mason Value Trust.
The latter stunned investors (and fund watchers) in 2008 with a 55 percent nose dive, but so far this year, the fund is up 12 percent -- 3 percentage points over the S&P.
Should we call it a comeback? Not so fast, says Adam Bold, founder and chief investment officer of the Mutual Fund Store, an investment management firm with 65 U.S. locations. He says investors should look beyond a fund's recent performance and focus on how it has historically navigated downturns and bull markets (long-term record is also a factor.)
Bold recently shared his perspective on fund performance. Excerpts:
Considering the big picture, how much weight should investors put on a fund's performance during 2008's market swoon?
My theory is that many of the best fund managers did the worst in 2008, and the reason it happened is that by definition, the best fund managers pick the best stocks. And last year, we had a liquidity crisis .... It turns out that the only things that were liquid in 2008 were fantastic stocks and high-quality bonds, so the best things got hurt the most because they were the most liquid. So as we return to a market with much more normalcy, stocks are being evaluated on future earnings, and bonds on the anticipated ability to pay interest and ultimately to pay their principal back.
How do you determine which funds are worth keeping and vice versa?
I spend lot of time trying to find out which managers are good managers that had a bad year and which have lost their touch.
I'm looking at calendar-year returns and how the fund did in 2000, 2001, and 2002, and I'm using that as a baseline for how I expect it to perform in poor years. Then I look at 2003 to 2007 for how I expect it to do in good years. I'm disregarding 2008.
Some really good managers had a bad 2008 that messed up their track records, so you cannot look at average returns. I think conditions like we had in 2008 are unlikely to repeat themselves.
I also look at how the funds have done since the March lows. I can forgive managers that have a long track record of consistently good performance but a bad 2008, but not those that are now lagging on the upside.
In your opinion, which funds have lost their touch?
Look at Fidelity Magellan.
It's been bad a long time and was down 49.4 percent in 2008 when the S&P was down 37 percent. Now it's up 13 percent in 2009, so it's doing better. I call it the "I love the '80s" fund. It was better under Peter Lynch, and its track record has been bad for too long.
Dodge & Cox was down 43 percent last year; it did poorly in 2007, really poorly in '08, and it's not great this year. I think they've lost their touch.
American Funds' Growth Fund of America is another. It was down 31.9 percent last year, and now it's up 9.8 percent, which is better than S&P 500. But they manage by committee, and when I look at their five-year track record, I can't tell if the same people that were making decisions five years ago are making them today.
Their performance has been pretty good overall. But certain people in this world are really gifted. Look at a guy like Tiger Woods, who's shown himself to be someone who wins year after year after year. That doesn't mean he will win every tour, but clearly, your odds will improve if you go with him. It's the same with managers who have historically done better than their peers -- it tends to perpetuate itself, and that's also true for those that have done poorly. The SEC says past performance is no guarantee of its future success. I'd say that it's not a guarantee, but it's a darn good predictor.
Of the household names that have been rebounding in 2009, which would you say are good funds that had a bad year?
Janus 20 Fund was down 42 percent last year, which is 5 percent worse than the market, and is up 18 percent so far this year.
This fund was a victim of liquidity crisis in 2008. They actually picked good stocks.
There are a few lesser-known funds that have really bounced which I still like. One is Loomis Sayles Bond, run by Dan Fuss. It's a bond fund that was down 22 percent last year and is now up 17 percent in 2009. It's also in the top 10 percent of all managers over the past decade. This is a good manager that had a bad year. Another I like is the Kinetics Paradigm fund, which last year was down 53 percent and is now up 18 percent. I consider it a large company growth fund. The managers have beat S&P every single year except 2008.
A fund I still think going to be good is T. Rowe Price Cap Appreciation. It's a balanced fund that was down 27 percent last year and is now up 12 percent. The reason it was down is that they have corporate bonds in there, and corporate bonds got crushed even if they were good companies -- nobody wanted anything but treasuries, and high-quality stocks got crushed. If you look at its long-term track record, it's in the top 2 percent of all balance funds.
What are some trends you're seeing in 2009?
One interesting thing is that I've seen lot of managers who would normally have 100 stocks in their portfolio but have taken it down to 50 or 60.
Stocks were beaten up for no reason, and if they were concentrated, they really got beaten up. We are in a stock picker's market. So actively managed funds are a good place to be. Take an index fund that follows the S&P 500 -- they had to hold GM until the day it went bankrupt.
A lot of the good managers are concentrating their portfolio in a few stocks they feel good about.
We have had this volatility and bounce, and a number of managers have picked up the level of turnover in their portfolios. There's been a lot of sector rotation going on, so even managers that haven't traded much are trading more. They'll sell stocks after they've had a 35 percent to 40 percent run and go into something hasn't run as much. As we return to more normal markets, the amount of trading will normalize.
As the market improves, where are individual investors putting their money? The numbers show that many are piling into riskier asset classes.
I'm weary of the emerging markets. It scares me to death -- people are doing the wrong thing; they buy at the wrong time. The market recycles, and you want to be where it goes next, not where it's been. China's up 85 percent from its lows, and when I see 60 percent to 65 percent fund flows going to emerging markets, it feels like when people chased tech stocks in '99 or oil stocks at end of 2007. There's no question that China and India will become large financial powers, but the question is how much of that [expectation] is already built in.