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THE FIVE MANAGERS

of the

Jensen Portfolio fund

That disciplined strategy has worked well for the fund over the last decade. Its average annual 6.9% return during that time period puts it in the top 6% of Lipper's large-cap-core classification. But when a fund holds stocks for the long haul like Jensen does, it's inevitable that over time some of them will be out of favor. Indeed, that seems to be what's happening lately. As of Thursday, Jensen was in the bottom 25% of its category during the trailing three-year period. That seemingly Jekyll & Hyde performance, not only at Jensen but at dozens of similar funds, leaves shareholders in a conundrum: Should they ride out the rough patch, or should they sell?

My clients want to know, says Brian Graeme, founder of Graeme Capital Management in Dallas, whether they are "going over a cliff or into a valley."

We have wrestled with those same concerns. So this week we felt compelled to devote our mutual-fund screen to those types of up-and-down performers. We started with 181 funds that are in the top 20% of their peer groups over the trailing decade and in the bottom 40% of those same categories over the last three years. We got the list down to 58 by knocking load funds out of contention. Finally, we added in our usual performance and fee criteria. That left us with 26 equity funds.

But not all of those offerings made the table below. This week's fund screen is a bit more subjective than previous ones. We also weighed portfolio holdings, manager experience and, most importantly, the advice of financial advisors we have interviewed the last year who actually have money on the line in an effort to gauge which funds had the best chance of turning a corner soon. In other words, if you own one of the five funds that follow and that includes Jensen don't pack it in just yet.

Of course, we have been wrong in the past. The last time we did this screen, back in October, we bet Muhlenkamp, Mairs & Power Growth and Ariel Appreciation would make a comeback. Those funds are either still working their way back or have even worsened. Muhlenkamp is squarely at the bottom of Lipper's multicap-value category over the last 36 months.

There are plenty of reasons why mutual funds like those can go astray. If you drill down on the funds we looked at this week a lot of them feature concentrated portfolios of a few dozen stocks. So when one goes south and that happened quite a lot it can influence the fund's total return. The overall strategy can also fall out of favor, as was the case with growth-stock investing earlier this decade and is the case now with small-cap stocks. Finally, even good managers can go into a slump. The best example of that is Legg Mason Value Trust's Bill Miller. He beat the returns of the S&P 500 for 15 straight years. But he's been in the red since that run came to an end in 2006.

None of that, though, is a blatant reason to sell a fund. Indeed, managers should be rewarded for sticking to their strategies through thick and thin and for investing with conviction. That said, if a fund's downturn can be attributed to a change in leadership or a change in strategy then there is instantly cause for concern.

"The first thing you want to look at is whether the manager responsible for the good performance during years 1 through 5 is still the manager responsible for [the poor performance] the last two of three years," says Scot Stark, owner of Stark Strategic Capital Management outside of Baltimore. He's willing to give a good manager a bit of a free pass, but, he adds, a manager change is a whole other ballgame. "If it isn't the same guy, it can be cause for alarm."

Another consideration: taxes. If you invest in a taxable investment account try to gauge whether selling will trigger a bill from Uncle Sam at the end of the year. If you're in a 401(k) or an IRA the decision will be much easier.

One fund to watch is Oakmark International. At the end of 2006 we proclaimed this offering and its manager, David Herro, the best international fund and our Manager of the Year. Herro uses a contrarian stock-picking style that hinges on finding well-run companies trading at a deep discount. Over the last 10 years he's produced an average annual return of 10.3%. But Herro has found himself lagging the pack lately because he has refused to jump into red-hot energy, industrial materials and commodities plays in a big way. Indeed, his portfolio, according to Morningstar, has minimal exposure to those industries.

Meanwhile, Janus Overseas, a fund that is top rated over the trailing one-, three-, five- and 10-year periods, has almost a quarter of its assets in these sectors. That's made a big difference: Over the last year this Oakmark fund has lost 16.5%, while Janus Overseas has gained 11.6%. However, we wouldn't be surprised to see the run-up in energy eventually cool off. And when that happens Oakmark will likely rise to the top once again.

The Criteria
The funds on our list had performance track records that put them in the top 20% of their peer group over the trailing decade but also in the bottom 40% of that same category over the last 36 months. They are open to new money, require a minimum investment under $5,000 and charge an expense ratio less than 1.5%. As usual we didn't include load funds on this screen. The seven below are the funds we think have the best prospects of making a comeback.

Also See:

• Midcap Funds Rebound From Bad First Quarter

• Real-Estate Funds Quietly Make a Comeback

• More Funds That Are Worth Their Weighty Loads

See the Fund Screen Table

Source: Lipper

Note: Data as of June 5, 2008

Long-Term Winners/Short-Term Losers Screen Recipe

• Midcap Funds Rebound From Bad First Quarter

• Real-Estate Funds Quietly Make a Comeback

• More Funds That Are Worth Their Weighty Loads

* The screen does not include fixed income or money market funds