Some Value Funds Avoided Worst Financials

They don't call 'em value traps for nothing. Many fund managers who snapped up big-name financial stocks at what seemed like fire-sale prices over the past few months have gotten burned. Some of the companies hastily sold to competitors for pennies on the dollar (Bear Stearns and Merrill Lynch (MER)), others swapped ownership stakes for federal assistance (Fannie Mae (FNM), Freddie Mac (FRE) and AIG (AIG)) and a few went belly up (most notably Lehman Brothers).

Even Morgan Stanley (MS) and Goldman Sachs (GS), considered the best of their breed, haven't been good bets despite surviving the Wall Street purge. The two firms are now shelving their once-lucrative investment-banking models to become plain-vanilla commercial banks, meaning the big profits that bargain hunters hoped would return may be lost forever. Yet not every fund manager looking for deals amid the downturn took the bait.

Since big financial stocks generally fall into the "large-cap value" category of investing styles, we used SmartMoney.com's Fund Screener to find the best- and worst- performing mutual funds in this group. To identify the best, we looked for no-load funds whose year-to-date and five-year returns are better than the group's average. We also narrowed our search to funds that are open to new investors, have below-average expense ratios and require no more than $5,000 for first-time investments. Size-wise, they had to have more than $100 million in assets.

To find the worst, we used the same criteria but in reverse in terms of performance and expenses, and we didn't exclude load funds.

The big winner? FMI Large Cap (FMIHX), which is down 5% this year compared to an average 14% for other large-cap-value funds. For the past five years, its 10% annualized return is about double the 5% group average. It does count a few financial stocks among its top 25 holdings, including Bank of New York Mellon (BK) and Berkshire Hathaway (BRK.A), but none of the most prominent names that have gotten mauled by this bear market.

On the losing side, Allianz Global Investors Value R (PPVRX) was at the bottom of the heap, giving back 27% so far this year and returning barely 2% annually for the past five. Among its largest recent holdings was American International Group, the huge insurer the feds had to bail out last week. The fund also took big hits from Citigroup (C), commercial finance company CIT Group (CIT) and investment advisor and insurance specialist Genworth Financial (GNW). AIM Large Cap Basic Value (LCBAX) had four share classes among the bottom, so we used the A share data for our chart below. Among its recent holdings: mortgage giant Fannie Mae, battered insurer XL Capital (XL) and Moody's (MCO), one of the credit-rating agencies blamed by many for failing to recognize the growing crisis in mortgage-backed securities.