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Mutual Funds

Four Big Surprises

Some funds managed to perform well both this year and last, and others were stinkers both years.

What a remarkable time to be an investor. First, you suffer through the worst bear market since the Great Depression, then you experience one of the best spurts ever. The rally -- Standard & Poor’s 500-stock index soared 60% between March 9 and October 8 -- has been strongest among some of the areas that were hardest hit in 2008. In the fund world, this translates into the worst-shall-be-first effect: Many of last year’s weakest performers are among this year’s best. And many of last year’s winners are this year’s dogs (see bear-market funds, for instance).

Some funds, however, managed to perform well both this year and last, and others were stinkers both years. Let’s look at some of these surprises.

The managers of Brown Capital Management Small Company (symbol BCSIX) are remarkably patient. With annual portfolio turnover typically on the order of 10%, we can rule out the notion that they rode last year’s best-performing sectors (the ones that lost the least) and then hopped onto real estate and China this year.

In fact, the managers, led by Keith Lee, just held on to the same small but fast-growing companies they’ve had for years. This steady approach means they are likely to stick with a company even when it hits a pothole and are unlikely to sell a stock because it has risen a lot. The fund’s lack of energy stocks helped it keep its losses to 30% in 2008; solid sales and profit gains among its holdings helped propel the fund to a 39% gain this year (all performance figures are through October 8). Brown Small Company’s long-term record is excellent, although it achieves its returns in fits and starts.


Despite a torrent of correspondence questioning our intelligence and sanity (not to mention our morality), Morningstar kept Oakmark Select I (OAKLX) on its list of Fund Analyst Picks last year. And, yes, 2008 was the year Washington Mutual, in which Select had an outsize position, withered and then was acquired for next to nothing.

Yet even in 2008, managers Bill Nygren and Henry Berghoef beat the market and most large-blend funds by a small amount. And so far this year, Select gained 46% as its debt-heavy but still-sound holdings came roaring back.

In recent years, Nygren and Berghoef have shifted into more-traditional growth companies because they seemed so cheap. Although this looked like a poor move at first, the managers have been vindicated. Despite the WaMu gaffe, Nygren’s record since launching Select in 1996 is exquisite. He hasn’t lost his touch, and we’re pleased we didn’t toss him and Select overboard.

Turning to the disappointments, one of the biggest has been Vanguard Asset Allocation (VAAPX). Mellon Capital Management allocates the fund’s assets among the S&P 500, Barclays Capital Long U.S. Treasury Bond index and cash. Because Mellon leaned heavily toward stocks in 2008, the fund lost 36%, just one percentage point better than the S&P 500 did.


This year, it gained 15%, five points less than the index’s rise, landing it in the bottom 15% of Morningstar’s moderate-allocation category. One problem is that the fund restricts its stock holdings to the S&P 500 -- not a good thing when big-company stocks trail their smaller brethren. Moving 10% of the fund’s assets from stocks to cash in the second quarter didn’t help.

Bridgeway Aggressive Investors 2 (BRAIX) fell off a cliff in ‘08, sinking 55%. The fund, a former member of the Kiplinger 25, gained 23% so far this year, but that still puts it in the bottom 20% of mid-cap growth funds. John Montgomery, who launched Aggressive Investors 2 in 2001, uses sophisticated computer programs to pick stocks. But so-called quants were hurt by the sheer speed of events during the financial crisis and by massive redemptions from hedge funds that employ similar tactics. Montgomery is tight-lipped about his black-box models, so investors face a challenge in deciding whether to hold or fold.

Columnist Russel Kinnel is director of mutual fund research for Morningstar and editor of its monthly FundInvestor newsletter.