The Best Funds for 2009

In the markets, excess is the rule, not the exception. Thus, tech stocks soared to absurd levels in the late 1990s, then plummeted further than made sense. Ditto for the housing bubble -- and for the current stock-market collapse.

The current bear market has lasted well beyond the point at which common sense says it should have ended. Stocks are cheap; bonds (except for Treasury bonds) are even cheaper. Yet all investors want to do is sell.

But market trends do end. I'm betting the bear market will be over before midyear. Why? The late Sir John Templeton, a fabulous investor, advised: "Buy at the point of maximum pessimism." If we are not there yet, we're surely close (in fact, there's a chance that this bear market hit its ultimate low on November 20). What's more, most economists think the economy should hit bottom sometime in 2009. Typically, the stock market starts up three to nine months before the economy's nadir.

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At the end of bear markets, the stock market usually rises fast and far. So in choosing my best picks for 2009, I emphasize aggressive stock funds. Here are my favorites:

Bridgeway Aggressive Investors 2 (symbol BRAIX) had a horrible 2008. Until now, the fund had never really paid a price for its high volatility. But like so many other funds with winning long-term records, Bridgeway was hit hard over the past year. Through December 26, the fund has lost 57% -- 18 percentage points more than Standard & Poor's 500-stock index.

John Montgomery and his colleagues use sophisticated computer programs to pick stocks. Based in Houston, Montgomery has been one of the most successful "quants" in the business. From its inception in August 1994 through November 30, 2008, Bridgeway Aggressive Investors 1 (which is a near clone of Investors 2 and closed to new investors) has returned an annualized 12% -- an average of more than five percentage points per year better than the S&P 500.

Montgomery got clobbered this year because he stayed too long in the bull market in energy and industrial materials stocks, which started to collapse late last summer. But his time-tested methods should pay off big-time next year.

The same malady that crushed Bridgeway zapped Boston-based Ken Heebner, whose CGM Focus (CGMFX) lost 50% in 2008 through December 26. Heebner failed to exit energy and industrial-materials until after they had plunged along with the economy.

He subsequently pulled a classic Heebner move -- exchanging most of his commodity stocks for beaten-down financials. Heebner is a sector rotator. He identifies a sector or two or three that he likes -- and invests almost all his assets in them, usually holding only about 25 stocks.

Like Bridgeway, CGM Focus is an extremely volatile fund. I don't think anyone should have more than about 10% of his or her stock money in CGM.

But the fund's long-term record is stunning. Over the past ten years through November 30, CGM Focus returned an annualized 18%. That's an average of 19 percentage points per year better than the S&P.

Loomis Sayles Bond (LSBRX) posted the awful numbers you'd expect to see only in a stock fund in 2008: down 24% through December 26.

The fund ventured too early into corporate debt, including high-risk "junk bonds," which account for about 25% of the fund's assets. Other investors have fled corporates for the warm bed of Treasury securities. Loomis, meanwhile, sold its last Treasuries in November.

Lead manager Dan Fuss says the current bond market offers the best opportunities in the 50 years he's been in the business. "The only thing people want is cash," adds co-manager Kathleen Gaffney. "That's an end-of-the-world type of craziness." Over the next couple of years, she says, corporate bonds could return a total of 30% or 40%.

Loomis Sayles Bond has delivered excellent long-term results. From the inception of an older, identically managed institutional version of the fund in 1991 through November 30, Loomis Sayles Bond returned an annualized 8.5% -- an average of 2.4 percentage points per year more than Barclays Capital Aggregate Bond index.

T. Rowe Price Emerging Markets (PRMSX) had a rotten year, even for a fund specializing in emerging markets -- one of the hardest-hit sectors of the investing world. Through December 26, the fund tumbled 62% -- six percentage points more than the MSCI Emerging Markets index.

The fund's biggest mistake: It still has 14% of its assets in Russia, which has been creamed by the crash in oil-and-gas prices. Why the managers chose to put so much in Russia -- which is far from a free-market economy -- is beyond me.

But I still have confidence in Price's investment people and process. Two new lead managers will take over in March, but I don't think that will affect the fund's quality. Price has 21 analysts dedicated to emerging markets -- a large plus.

Vanguard Primecap Core (VPCCX) had a decent year, at least on a relative basis. It lost 34% through December 26, outperforming the S&P 500 by five percentage points. The fund emphasizes stocks of large, high-quality companies -- the area that, I believe, remains the sweet spot of the market. Investors should keep the bulk of their stock money in funds such as this one.

The fund owns blue chips such as drug makers Eli Lilly (LLY) and Amgen (AMGN), tech plays Intuit (INTU) and Oracle (ORCL), Whirlpool (WHR), and oil-services leader Schlumberger (SLB). The market is offering these gems at virtually the same valuations as much riskier fare.

The fund is new, but Vanguard Primecap (VPMCX), a near clone of Primecap Core that is closed to most new investors, ranks in the top 3% among large-company growth funds over the past ten years. Sponsored by one of the few management teams ever to leave the superb, broker-sold American funds, Vanguard Primecap returned an annualized 12% from its inception in late 1984 through November 30.

Steven T. Goldberg (bio) is an investment adviser and freelance writer.