Fund Watch

The Best Funds of 2009

Birmiwal Oasis and Aegis Value take top honors among actively managed, diversified, domestic stock funds.

By Elizabeth Ody, Associate Editor, Kiplinger's Personal Finance

December 31, 2009

For stocks, 2009 was one of those years when you could have thrown a dart at the market and turned up double-digit returns. Despite a 1% selloff on the final trading of the year (and the decade), Standard & Poor’s 500-stock index delivered a total return of 26.5% in 2009, while riskier parts of the market, such as emerging-markets stocks and bank stocks (that is, the segments that lost the most during the 2007–09 bear market), finished with spectacular gains.

As always, though, some funds did better than others. Among traditional, actively managed, domestic stock funds, the top nod went to Birmiwal Oasis (symbol BIRMX), which through December 30 returned a stunning 93%.

It’s tough to know what to make of Birmiwal because manager Kailash Birmiwal avoids the press and offers little guidance in the fund’s literature as to how he chooses investments. The portfolio’s turnover, at last report, was a breakneck 999%, implying that Birmiwal replaces every stock in the fund once a month or so. He uses some leveraged exchange-traded funds in the portfolio to juice returns, including, at last report, a fund designed to deliver three times the daily returns of a small-company stock index and another fund designed to deliver three times the daily returns of a financial-stock index. That’s racy stuff.

Usually, we would caution you to be wary of funds whose managers don’t explain how they do what they do -- particularly when their expenses are in the stratosphere. (Birmiwal charges a management fee of 2.9%, which increases to as much as 5.3% when the fund beats the market and falls when the fund lags the market.) But in this case, it’s a moot point: The $16-million fund is closed to new investors, and it states on its Web site that it doesn’t anticipate ever opening to new investors.

But you won’t be lowering your standards by investing in 2009’s runner-up, Aegis Value (AVALX), which returned a mere 92% through December 30. Manager Scott Barbee’s style of investing in deeply discounted small-cap stocks was painfully out of favor during the stock-market rout. The fund shed 70% during the bear market, compared with the 59% loss of a relevant benchmark, the Russell 2000 Value index, which follows the shares of small, undervalued companies. But even as Aegis’s holdings were in a tailspin and investors were yanking millions of dollars from the fund each month, Barbee made a few key moves that set the fund on track for its superb 2009 performance.

By far, Barbee’s best call was to take a gamble on the auto industry. Aegis’s biggest position, Dana Holding Corp. (DAN), which makes auto chassis, gained 1,366% in 2009 through December 30. Barbee estimates that the stock contributed at least 15 percentage points to the fund’s return. The key, Barbee says, was that Dana continued to generate positive cash flow throughout the economic crisis. Also, “the company was restructuring, which looked likely to enhance its profitability over time,” he says. He increased the fund’s tiny stake to 2% of assets in the first half of the year, when the stock traded as low as 20 cents. It closed December 30 at $10.85.

Another major winner was Horsehead Holding Corp. (ZINC). It gained 172% over the year, to $12.80, adding seven percentage points to Aegis’s 2009 return, Barbee estimates. Horsehead is paid to haul away zinc dust, an industrial byproduct, from metal mills that generate the stuff. The company then refines the dust into something usable and resells the product to rubber and steel-galvanizing markets.

Ever discriminating, Barbee saw in early 2009 that the amount of cash per share on Horsehead’s balance sheet equaled the share price, “so you were getting the whole business -- its entire infrastructure -- for free.” And he figured that even if the entire zinc industry dried up, the firm also owned a coal-fired power plant that could support the stock. “This company could last for ten years in a bad business cycle,” he says. “It had a good margin of safety.”

Barbee’s particular blend of detail-oriented, deep-value investing has served shareholders well over the long run. The fund’s 10.5% annualized gain over the past ten years beat the Russell 2000 Value index by two percentage points per year, on average. You’ll often be out of sync with the market in this fund, but you’ll be in capable hands. The fund’s annual expense ratio is 1.50% (not exactly a bargain but not outrageous), and the initial minimum investment is $10,000.

• Got a question? E-mail me directly at investing@kiplinger.com. Want to be heard? Leave a reader comment below.

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