ByROB WHERRY
Welcome to SmartMoney.com's third annual ranking of the fund industry's best offerings. Over the last 12 months we conducted hundreds of interviews with fund managers, financial advisors and industry experts, looked at the portfolios of dozens of mutual funds and tracked return data through some of the worst conditions the stock market has ever seen. And that has led us to this: Our winners in seven key categories. In two additional categories we give kudos to some newcomers as well as a fund that managed to claw its way back to the top last year. We think the names on this list are worthy of consideration for a spot in your portfolio.
While we use a wide range of criteria to ultimately make our top picks, by far the most important one is performance during the previous year. The average domestic equity fund dropped 37.6% in 2008; world equity offerings fell a startling 45.8%. The funds we considered for this list were at least in the top 10% of their individual Lipper categories return-wise in 2008. That means they were able to stem some of the bleeding.
Financial advisors call that preserving capital. It sounds good on paper. And, admittedly, we do see merit in being able to hold losses to a minimum in down markets. But it will nevertheless still be a painful realization to readers that most of the funds we looked at had good years because they were able to lose only 30% or 25% or 20%. Indeed, just one domestic equity fund, Forester Value (FVALX),
We don't solely rely on 2008 numbers because we don't want to reward a one-hit wonder that'll flame out just as fast as it showed up on the scene. Our mutual fund winners have decent three- and five-year track records, managers who have proven themselves through thick and thin and the offerings charge minimal fees. We also listened to our readers, who submitted candidates during December. One recurring theme among all the winners: a deft ability by the managers to avoid or at least sidestep the credit crisis. Also, we usually exclude load funds from our screens, but for this one we allowed load and no-load offerings to go toe to toe.
The nontraditional categories -- ETF, Newcomer and Comeback -- are more subjective. The ETF winner is usually a fund that has had a profound impact on the industry vs. anything to do with performance. In that case, we look at trading volume, asset accumulation and general investor buzz. The Newcomer designation is bestowed on a fund that launched during the year and either had a novel approach to investing or a good performance run during its first few months. The Comeback refers to a fund that was down in the dumps at one point but jumped back into the top 10% of its Lipper category during 2008. We hope this last category is an extremely competitive one next year.
Before we announce this year's winner we feel compelled to look back at the Best of 2007 to see how those funds have done since receiving our accolades. Unfortunately, we don't have much good news to report, proving, once again, that 2008 didn't discriminate when it came to whacking all kinds of mutual funds and their managers.
Of the five main fund winners we proclaimed last year, only one, Thornburg International Value (TGVAX),
On the following pages, you'll see the winners from each of these categories.
- Fixed Income Fund/Managers of the Year
- Large-Company Fund
- Midsize-Company Fund
- Small-Company Fund
- Multicap-Company Fund
- International Fund
- Exchange-Traded Fund
- Comeback of the Year
- Newcomers of the Year
Fixed Income Fund/Managers of the Year
| Source: Lipper, Morningstar, Company Reports for all accompanying tables Note: 2008 return data between Dec. 31, 2007 and Dec. 31, 2008; All other return data as of Jan. 8, 2008 | ||
|---|---|---|
| 2008 Return (%) | Fund: 4.3% | Barclay's Aggregate: 5.2% |
| Fund's Historical Average Annual Return (%) | 3-Year: 5.0% | 5-Year: 3.8% |
| Managers | Robert Rodriguez, Thomas Atteberry | |
| Expense Ratio | 0.61% | |
| Front Load | 3.5% | |
The managers who run this $2.3 billion intermediate-term bond fund, Bob Rodriguez and Tom Atteberry, were some of the first experts to point out the bubble that was growing in the housing market and the implications it would have on the fixed-income sector once it burst. Not that they would've been investing in such risky fare anyway. The pair, especially Rodriguez, is known for using a strategy that at its heart has one simple rule: Preserve investors' capital. Their foresight paid off in 2008. As competitors were scrambling to deal with the housing implosion and the credit crisis, FPA New Income had already moved into cash and low duration bonds.
In the fixed-income world bragging rights usually come down to a slim margin of a few basis points. Not so this year. According to Morningstar, FPA New Income gained 4.3% in 2008, a whopping 920 basis points (or 9.2 percentage points) ahead of the average intermediate-term bond offering. It was one of the key reasons why Rodriguez and Atteberry won the fund data company's 2007 fixed-income managers of the year prize. "When everything hit the fan in 2007 and 2008, the fund was on safe ground," said Russel Kinnel, director of mutual fund research at Morningstar, when he announced the award.
Large-Company Fund
| 2008 Return (%) | Fund: 0.4% | S&P 500: -37.0% |
|---|---|---|
| Fund's Historical Average Annual Return (%) | 3-Year: -0.8% | 5-Year: 4.8% |
| Manager | Thomas Forester | |
| Expense Ratio | 1.35% | |
In many regards the mutual fund world is a David and Goliath battle. Most of the billions of dollars of assets that flow into retirement accounts quickly wind up in the coffers of funds at giants like Fidelity, American Funds or Vanguard. Meanwhile, hundreds of small but capable funds languish in obscurity.
This year, though, a small fry managed to one-up his bigger brethren. Forester Value was the only diversified domestic equity fund to finish in the black. OK, so a 0.4% return doesn't sound all that great at first mention. But when its more than 1,500 large-cap-value competitors turned in an average 37% loss, well, Forester's 0.4% gain started to look good pretty quick. It is now the top large-cap-value fund during the trailing one-, three- and five-year time periods.
We scratched our heads a little when we first came across this fund at the beginning of last summer. At the time, it was a relative unknown that had managed to pop to the top of its peer group. Manager Thomas Forester had posted a 7% return through June 30 by avoiding the housing and credit crises. "You could see it coming," says Forester. Instead, he moved around 25% of his fund into cash. It hadn't made our screens up until then because of a technicality. We usually require a fund to have $50 million in assets before we consider it. (Forester has since passed this mark.) One of our industry colleagues was skeptical enough to dub it a "Stupid Investment of the Week" because he thought investors would jump into what could be a one-hit wonder. Despite our initial reaction, a funny thing happened: Forester Value continued to beat its competitors month after month. The author did a mea culpa and we came around, too.
We've seen this story line play out before. A good manager breaks off from a big company to start his own fund and develops a following once he posts good performance numbers. That's the case with the Wintergreen fund (WGRNX),
Forester, a Warren Buffett-esque value investor who likes to buy low P/E stocks with good earnings prospects, is now putting some of that cash to work. He's been buying stocks he thinks will prove resilient in what could be a temperamental 2009. Those names include Kraft (KFT),
Midsize-Company Fund
| 2008 Return (%) | Fund: -9.0% | S&P 500: -37.0% |
|---|---|---|
| Fund's Historical Average Annual Return (%) | 3-Year: 0.3% | 5-Year: 2.4% |
| Manager | John Hussman | |
| Expense Ratio | 1.11% | |
John Hussman is one of the most unique fund managers we've come across over the years. We saw him literally steal the show during a 45-minute panel discussion on alternative investments with two of his peers at the 2007 Morningstar conference. On his web site, he ruminates weekly on everything from shaky accounting (he used a lemonade stand to explain his points) to bond durations. It's an expertise built from a career in the academic world, including a stint at the University of Michigan, and now running two funds.
Strategic Growth is a hard fund to define and, hence, may be a controversial choice for this category award. Hussman employs a complex strategy that involves studying industry or economic trends, trading volume and valuation metrics, among other things. He also is able to buy put and call options to hedge his portfolio depending on whether he's feeling bullish or bearish. That gives the fund a long-short feel. Indeed, that's how it's labeled in Morningstar's database.
Regardless, Hussman and his Strategic Growth fund had a good year. The fund currently owns companies like Amazon.com (AMZN),
Small-Company Fund
| 2008 Return (%) | Fund: -20.4% | S&P 500: -37.0% |
|---|---|---|
| Fund's Historical Average Annual Return (%) | 3-Year: -3.5% | 5-Year: 3.6% |
| Managers | Ted Kellner, Patrick English | |
| Expense Ratio | 1.22% | |
It was a good year all around for the funds carrying the Fiduciary Management name. FMI Common Stock lost 20.4% in 2008 vs. a 33.4% drop for the average small-cap-value fund. That tally put it atop the category. Meanwhile, its sister funds, FMI Focus (FMIOX)
That's a credit to longtime manager Ted Kellner and his team. We first became acquainted with Kellner when we researched a story on the University of Wisconsin's MBA program, one of the few schools that allow students to run actual money. Kellner comes from a long line of distinguished fund managers who graduated from the school, including Brandywine Fund's Foster Friess, Oakmark's Bill Nygren and Fidelity's Stephen Petersen.
Kellner managed to navigate 2008 by sticking to what got him here in the first place: a disciplined strategy honed from years of experience. Kellner, who has run this fund since 1981, likes to find companies with growing revenues and earnings, increasing profitability and attractive returns on invested capital. That ultimately leads to a portfolio of around 40 to 50 stocks. And those names have held up well the last 12 months. But we also like Kellner for his long-term track record, too. This fund is in the top 6% of its Lipper category over the trailing decade.
Top holdings as of the last SEC filing include Arthur J. Gallagher (AJG),
Multicap-Company Fund
| 2008 Return (%) | Fund: -23.1% | S&P 500: -37.0% |
|---|---|---|
| Fund's Historical Average Annual Return (%) | 3-Year: -1.8% | 5-Year: 3.1% |
| Managers | Jean-Marie Eveillard, Matthew McLennan, Abhay Deshpande | |
| Expense Ratio | 1.20% | |
| Front Load | 5.0% | |
This was one of the most difficult categories to pick this year. There were plenty of funds that managed to mostly steer clear of most of the impact of the credit crisis. And they came from fund families we respect, like Tweedy Browne, Yacktman, American Century and Auxier. Complicating things further were two funds, Bread & Butter (BABFX)
Ultimately, we went with one of the industry's best managers. Jean-Marie Eveillard came out of retirement in 2007 and re-took the investing reins at a company he had helped run for decades. He didn't miss a beat. At this charge Eveillard and his team rung up a 23% loss on the year by building positions in gold and cash and buying firms that didn't get hit nearly as bad as some other stocks. It's the worst return this fund has posted since it launched in 2001 -- a distinction we're sure Eveillard isn't pleased with -- but it was good enough to put it atop the multicap core category. Indeed, its average competitor lost 38.8% during that same time period.
International Fund
| 2008 Return (%) | Fund: -30.1% | MSCI EAFE: -43.0% |
|---|---|---|
| Fund's Historical Average Annual Return (%) | 3-Year: -3.6% | 5-Year: 5.7% |
| Managers | David Samra, Daniel O'Keefe | |
| Expense Ratio | 1.23% | |
Like the multicap sector, we also struggled to find a legitimate break-out fund in the international sector, too. The funds that carry Lipper's "international" designation decreased an average 45.4%. As a group these funds were by far some of the hardest hit last year, maybe second only to China funds (down 52.7%) or Latin America offerings (-57.3%). We have to admit that picking over these funds didn't exactly lead to an inspiring choice. Should we really be rewarding a fund that lost 40%? It's a tough call.
We looked at funds from Thornburg, GMO, Dreyfus, Credit Suisse, BlackRock, Evergreen and other fund shops. Ultimately, we decided to follow the lead of the folks over at Morningstar and reward a small shop for some good work. The fund data company made Artisan's David Samra and Daniel O'Keefe its international managers of the year. We agree with that choice.
The duo searches for stocks that have strong cash flows and competitive advantages and balance sheets that aren't filled with ticking time bombs buried in the footnotes. Most stocks are trading at a level at least 30% below a target price when they enter the portfolio, says Morningstar. They avoided toxic financial stocks in 2008, the main reason they were able to post a 30% loss when peers in the international multicap core group dropped an average 43%.
Exchange-Traded Fund
ProShares Leveraged and Short ETFs
What started out as one of the most exotic concepts in the fund world quickly became one of its most popular in 2008 as investors looked for any advantage to navigate a volatile stock market. Leveraged and short ETFs use complex financial instruments to help them attain double the returns of an underlying index or double the inverse results of that same benchmark. In other words, if you are really bullish or really bearish these are your funds of choice.
The ProShares ETFs were primarily designed for sophisticated investors like hedge funds or institutions. But throughout 2008 we found financial advisors of every stripe considering or actually using them in their client portfolios. As the trading volume picked up in these funds they became a solid way to hedge a portfolio or make calculated bets about the direction of the market, regardless if a person was sitting on $1 million or $1 billion.
The buzz surrounding these funds came to a climax in September. As some Wall Street firms teetered on the brink of disaster there was an intense spotlight on short sellers who were preying on their demise. The SEC halted shorting in dozens of financial-services firms. The ProShares UltraShort Financials ETF (SKF)
The rising popularity of these funds has turned ProShares into the fourth-largest ETF firm with $21.3 billion in assets, right behind Barclays, State Street and Vanguard. It does have a big competitor in Rydex and recently Direxion launched funds that try to post three times -- yes, three times -- the returns or inverse returns of a given index. Some of these funds have been widely accepted already.
As ProShares gets noticed it could become a candidate to be bought out, a topic we brought up with founder Michael Sapir in December. "We don't have any current intention to sell the business," he said at the time.
Comeback of the Year
Mairs & Power Growth (MPGFX)
This fund has been around for over 50 years so it's used to the ups and downs of the stock market. It had experienced three years of middling performance between 2005 and 2007 that put it near the bottom of the large-cap category at times. But in 2008, its patient investing strategy put it back on top. Its 28.5% loss was about nine percentage points better than the category average. The fund is once again in the top 10% of its Lipper group over the trailing one-, three-, five- and 10-year time periods.
Mairs & Power Growth is something of an oddity in the mutual fund world. Instead of scouring every inch of the country or the globe for good stocks, it tends to stick close to its home in St. Paul, Minn. Most of the stocks in its portfolio are headquartered in or around its home state, including Medtronic (MDT),
Our top candidate for this award next year: Dodge & Cox.
Newcomers of the Year
IVA Funds
There were plenty of funds we came across this year that piqued our interest. Ultimately, though, we like to bestow this award on a fund, funds or fund company we think would make a good inclusion in any portfolio, regardless of its sophistication.
That's why we went with International Value Advisers. Fans of First Eagle funds will instantly recognize some of the firm's co-founders, including Charles de Lardemelle and Charles de Vaulx. Each worked at First Eagle's parent company and split off from it in 2007. These managers pick stocks based on high returns on capital, cash flows and whether a company has a significant market presence that can't be overcome quickly by a wily competitor. They will usually sell a given security when it gets 10% over or under a set target price.
The funds have only been on the market since October. But given the experience of de Lardemelle and de Vaulx we expect to see these funds garner considerable attention in 2009, especially if they start posting good numbers. Click here to see our recent interview with de Vaulx.
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