Adam Bold, the> founder of independent advisory The Mutual Fund Store, is keeping what he calls a bounce-back list tabulations of how some of his favorite funds have performed since stocks hit their lows earlier this year and late in 2008. As the Dow Jones Industrial Average hits and then surpasses the key 9000 level, Bold wants to sniff out the offerings that are successfully riding that run-up and those that aren't.
The last six months we ve been trying to figure out which managers just hit a bad patch last year and which managers have just gone bad, says Bold.
Spotting the difference between a temporary lull in performance and a more serious setback is a tough task for investors like Bold. Even the industry s best managers inevitably have a down year or two when the stocks they own fall out of favor with the broad market. Many investors stick by these pros in the hopes they will regain their momentum. However, not all managers can stage such a recovery. The industry is littered with top-tier funds that fell into the basement of their categories and stayed there for years.
This week SmartMoney's fund screen tries to handicap which offerings are actually back on track. We started with a universe of 1,685 equity funds that had above-average 10-year track records. We then narrowed that group to 344 by looking for funds that were in the bottom 40% of their respective categories during the three-year time period. In addition, the funds had to beat the year-to-date performance of the S&P 500. Finally, we favored funds with proven managers, ones that featured stock portfolios poised for growth and we made sure each offering did well coming out of the last bear market. Below are 10 funds we think could be on the comeback trail.
Of course, there is no guarantee that any of the funds will regain its former glory. Indeed, some funds in the table below, like Dodge & Cox Stock (DODGX)
Investors should be wary about focusing on past returns. Three- and five-year returns, for example, can easily be skewed by an up or down year. Last year s downturn was so severe that it even impacted the trailing 10-year returns of some funds. It may be more revealing to study individual 12-month spans. In his analysis, Bold treats 2008 almost as an anomaly since he thinks good managers got whacked when hedge-fund-type outfits were forced to sell stocks.
What we had last year was a liquidity problem, says Bold, who places more emphasis on how funds did after the 2001-02 bear market. What [sophisticated investors] wanted to sell was their CDOs [collateralized debt obligations] to meet margin calls. But they couldn t, so they sold whatever was the most liquid. The best stocks had liquidity.
Ultimately, says Bold, investors need to weigh a poor performance against any emotional attachment they may have to a fund and its manager.
When you have a manager who has done a great job for a long period of time you can give him the benefit of the doubt for longer than a manager who has [a spotty track record], says Bold. But ultimately you can t fall in love with anybody.
The Criteria: The no-load, equity funds on our list are in the top 40% of their Lipper categories over the trailing 10-year period and in the bottom 40% during the trailing three-year period. The funds are up at least 10% in 2009. We also added in some subjective criteria: The funds must have done well vs. the S&P 500 coming out of the last bear market and they must be run by companies or managers respected by advisors we talk to throughout the year. The funds are open to new money, require a minimum under $5,000 and charge an annual expense ratio under 1.5%.
|Ticker||Fund||Year-to-Date Return (%)||3-Year Average Annual Return (%)||5-Year Average Annual Return (%)||2003 Return (%)|
Note: Data as of July 23, 2009
|CHCGX||Chesapeake Core Growth||23.3||-7.0||-2.5||42|
|DODGX||Dodge & Cox Stock||12.5||-9.9||-0.7||32|
|PGVFX||Polaris Global Value||18.0||-10.2||0||47|
|SLASX||Selected American Shares||13.6||-6.2||0.4||30|
|TRVLX||T. Rowe Price Value||17.7||-6.0||0.7||30|
Fund Type = *
Annualized 3-Year Return (%) = Display Only
Rank in Classification (%) (3 year performance) >=60
Annualized 10-Year Return (%) = Display Only
Rank in Classification (%) (10 year performance) <= 40
Expense Ratio <= 1.5%
Load Fund (type) = No Load
Minimum Initial Investment <= $5,000
Open to New Investors = Yes
Total Net Assets ($ millions) >= 50
Year-to-Date Return (%) >= 10
* Screen does not include fixed income offerings. The final list was generated by favoring funds with managers recommended by advisors throughout the course of the year. Performance during the last bear market was also considered.>