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Mutual Funds

And the Leaders Are ...

Recent results are ugly. But after two awful bear markets since 2000, stock funds should perform better in coming years.

Historically, we've called this package, which lists the top-performing stock funds in a variety of categories over a variety of time periods, "And the Winners Are ..." But given the minus signs next to nearly all of the one-year returns and most of the three-year numbers as well, that mantle didn't sit right. It's pretty hard to call a fund that lost 25% over the past year a winner without bursting into laughter -- or tears.The awful truth about the 2007-09 bear market is that it left few stock funds or sectors unscathed. The average one-year return for the 11 categories featured below ranged from -20% to -32%. Of the 110 funds listed as one-year winners, only 15 were in the black. Were it not for a rollicking rebound that saw U.S. stocks soar 35% from the market's March 9 low through June 30, with foreign stocks doing even better, the results could have been far worse.

The recent bear market, combined with the 2000-02 setback, has undermined long-term returns. As a result, the average ten-year returns in two categories -- large-company growth and large-company blend -- are also negative. For stocks to lose money over so long a period is highly unusual. The good news is that after such a horrendous decade, the odds favor better results in the coming decade. Performance doesn't have to rock. A return to normalcy -- average yearly gains of 10% a year or so for U.S. stocks -- would do just fine. We'd settle for 8%.

If you want bigger returns, you'll have to take on more risk, and that means investing more abroad, particularly in fast-growing emerging markets. Some might even argue that a nation such as China, with its bulging coffers, is a safer place to invest than a deficit-wracked country such as the U.S.

To see which funds did best in their categories and which we think are most likely to thrive in the more-normal market we anticipate in the coming ten years, see below and our ONLINE FUND RANKINGS that let you sort by style and type. You also can DOWNLOAD OUR COMPLETE RANKINGS.

LARGE-COMPANY GROWTH FUNDS Losing steam as investors regain their appetite for risk

Stocks in this category held up comparatively well through the bear market. After all, these are the sort of companies (think providers of pop and pills) that people patronize no matter the state of the economy. But the group has lagged since stocks bottomed on March 9 and investors began to seek riskier assets.

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Reynolds Blue Chip Growth (symbol RBCGX) hit the top of the charts by piling into cash. Manager Fritz Reynolds's long-term record is spotty, however. Ken Heebner manages CGM Focus (CGMFX) aggressively. That got him into trouble over the past year as his bets on commodities and financials went awry. But when Heebner's good, he's really good. In buying market leaders, Fidelity Contrafund (FCNTX) manager Will Danoff doesn't obsess over the price he pays for a stock. Focus and Contrafund are members of the Kiplinger 25.

LARGE-COMPANY BLEND FUNDS A lousy finish to a lousy decade

This category, which focuses on stocks with a mix of growth and value attributes, is the one that most closely competes with Standard & Poor's 500-stock index, a key measure of U.S. stock performance. Arguably the top choice in this style is Fairholme Fund (FAIRX), which will almost surely have one of the best long-term records in the business when it celebrates its tenth birthday in December. Including the first half of 2009, the Kiplinger 25 member has beaten the S&P 500 nine times in ten years. Manager Bruce Berkowitz looks for stocks that are cheap relative to the free cash flow a company generates, and he'll often hold big cash positions. Also worth considering are the bargain-hunting Longleaf Partners (LLPFX), another member of the Kiplinger 25, and Sequoia Fund (SEQUX) (see Bear Market Bonus: 7 Great Funds Reopen).

RELATED LINKS

Fund Rankings by Type and Style

Download Our Complete Fund Rankings

How to Navigate the Fund Tables

The Best Exchange-Traded Funds

LARGE-COMPANY VALUE FUNDS Done in by big-bank stocks

This has not been a good category in which to hide. The collapse of financial stocks was particularly brutal to large-company value funds. Nevertheless, industry veteran manager Don Yacktman, joined by son Stephen, posted some impressive results with his two funds, Yacktman (YACKX) and Yacktman Focused (YAFFX), by holding relatively safe stocks, such as Coca-Cola. Amana Trust Income (AMANX), run by Nicholas Kaiser, has also shown impressive consistency over several time periods. Amana's Islamic investing principles helped it avoid minefields in finance and heavily leveraged businesses. Wasatch-1st Source Income Equity (FMIEX) underwent an ownership change last year, but steady manager Ralph Shive remains at the helm. Finally, after an extended dry spell, Kiplinger 25 stalwart Dodge & Cox Stock (DODGX is looking better this year.

SMALL AND MIDSIZE GROWTH FUNDS Winning by losing a lot less

FBR Focus (FBRVX) once again showed why it deserves a place in the Kiplinger 25. While it's technically a midsize-company growth fund, manager Chuck Akre is conscious of the price he pays for stocks. Also, he trades rarely, showing commitment to his picks -- and holding down taxable distributions. Given that Standard & Poor's MidCap 400 index was down 28% in the past year, FBR's 6.5% drop looks pretty good. The fund also sports an impressive long-term record. Ditto for another favorite, Meridian Growth (MERDX), which shows up on the winners lists over one, ten and 20 years. Longtime manager Rick Aster's fund has beaten the S&P 400 by an average of three percentage points a year over the past ten years, and has done so with less volatility. Computer-driven Bridgeway Ultra-Small Company (BRUSX) is also appealing.

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SMALL AND MIDSIZE BLEND FUNDS A bargain hunter holds its own

Several names from the Royce family, which is known for unearthing undervalued small-company stocks, show up on this list. Not surprisingly, two Royce funds that can sell stocks short to bet on falling prices did relatively well in recent years. But before you get too excited about Royce Select I (RYSFX) and Royce Select II (RSFDX), know that you need to pony up at least $50,000 and that you need to be a "qualified" (that is, well-heeled) investor to gain entry. Royce Low-Priced Stock (RYLPX) is a better choice for most investors. The fund, which mostly buys stocks selling for $25 per share or less, has beaten its benchmark by an average of seven percentage points per year over the past ten years. Tilson Dividend (TILDX), co-managed by Kiplinger's columnist Whitney Tilson, has held up by investing in reasonably priced stocks with high dividend yields.

SMALL AND MIDSIZE VALUE FUNDS The best of a decidedly bum batch

This category sports the smallest one-year loss among domestic diversified stock funds. Intrepid Small Cap (ICMAX) leads the pack, thanks to its focus on companies with no debt and hearty cash flow, plus its willingness to stray into larger-size companies when the opportunity arises. Charles Dreifus, manager of Royce Special Equity (RYSEX), goes for obscure small companies with sustainable competitive advantages, but he buys them only when they're dirt-cheap. His meticulous and cautious style has spared investors grief in tough times and rewarded them admirably in good times. Perkins Investment Management runs both Janus Perkins Small Cap Value and Janus Perkins Mid Cap Value (JDPAX). Thomas and Robert Perkins and their colleagues like stocks trading near historic lows and com-panies in turnaround situations.

HYBRID FUNDS Helped by their holdings in bonds and cash

Funds that protect against loss of capital stand out in this category. Hussman Strategic Total Return (HSTRX) plays it safe with more than half of its portfolio in Treasury inflation-protected securities. In stocks, manager John Hussman favors utilities and natural-resources companies. FPA Crescent (FPACX), a member of the Kiplinger 25, aims to match the returns of the S&P 500 with less risk by investing in bank debt, junk bonds and small-company value stocks. Permanent Portfolio's (PRPFX) eclectic mix, which includes precious metals, foreign currencies and global real estate stocks, has performed well over the past decade. In this grab-bag category, you'll also find a couple of reliable balanced funds, which invest in stocks and bonds. Oakmark Equit & yIncome I (OAKBX) and Dodge & Cox Balanced (DODBX) boast veteran managers and solid long-term records.

RELATED LINKS

Fund Rankings by Type and Style

Download Our Complete Fund Rankings

How to Navigate the Fund Tables

The Best Exchange-Traded Funds

DIVIERSIFIED INTERNATIONAL FUNDS No relief on the foreign front

During the past year, overseas diversification led to "diworsification" for many portfolios as the typical foreign fund lagged the average U.S. stock fund. The top performers included a number of fine value-oriented funds. You can read about Artisan International Value (ARTKX) in Bear Market Bonus. The team of managers who run Tweedy, Browne Global Value (TBGVX) and David Herro, manager of Oakmark International (OAKIX), are old hands at identifying stocks selling below the managers' estimation of a company's true worth. Janus Overseas (JAOSX) is a fund of a different color. Manager Brent Lynn invests in fast-growing companies and isn't shy about loading up on emerging-markets stocks. At last report, stocks from just three developing markets -- Hong Kong, India and Brazil -- accounted for 45% of the fund's assets.

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EMERGING-MARKETS FUNDS After a horrible 2008, a stunning recovery this year

As investors' appetite for risk goes, so go emerging-markets stocks. After falling off a cliff in 2008, diversified emerging-markets funds snapped back by an average of 61% from the market bottom on March 3 through June 30. Lazard Emerging Markets Equity (LZOEX) beat its peers over the past year by avoiding energy stocks and making good picks in Mexico and Brazil. Driehaus Emerging Markets Growth (DREGX), offered by an established practitioner of momentum investing, has built a fine long-term record with its aggressive approach, but newbie managers at the fund have yet to prove themselves. Gonzalo Pangaro, manager of T. Rowe Price Emerging Markets Stock (PRMSX), a Kiplinger 25 member, is looking to blue chips in Mexico, Brazil and China to help maintain his fund's solid long-term record.

REGIONAL AND SINGLE-COUNTRY FUNDS Communist China delights capitalist investors

This is always a volatile category, and this year was no exception. Last year China was out, but Chinese stocks performed brilliantly in the first half of '09. The relative strength and resilience of the Chinese economy, aided by massive fiscal stimulus, boosted returns of China funds and Asian funds heavily invested in the Chinese economy. Matthews China (MCHFX), managed by Richard Gao, sports a fine record. If you seek broader exposure to Asia, two fine regional funds with solid long-term records are T. Rowe Price New Asia (PRASX) and Matthews Pacific Tiger (MAPTX). For something with less volatility, consider Matthews Asian Growth & Income (MACSX), which invests in convertible bonds as well as in stocks. Latin America has also been on a tear this year. T. Rowe Price Latin America (PRLAX) is a solid performer.

SECTOR FUNDS Surprise! Four financial funds made money

Given the woes of financial stocks, it's a surprise to see funds that focus on this sector occupy half the slots of the past year's top performers. David Ellison, manager of both FBR Small Cap Financial (FBRSX) and FBR Large Cap Financial (FBRFX), beat his peers by hoarding cash and investing in stocks of high-quality banks. Underscoring the volatility of gold and gold stocks, precious-metals funds glittered over the past decade, but they are absent from the list of winners over the past year and the past 20 years. We prefer Pimco CommodityRealReturn Strategy (PCRDX, a Kiplinger 25 fund, as a steadier way to gain exposure to commodities. Biotech, health-care and technology funds populate the list of long-term winners. Vanguard Health Care (VGHCX) is a fine choice because of its experienced management team. But it requires a hefty $25,000 to start.