Share prices have been soaring for more than six months, so practically every stock fund is putting up fine numbers. But there's a surprising back story in this broad rally: A bunch of formerly prominent funds that fell apart before the onset of the bear market have staged a robust revival in 2009.
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An example is Ariel Fund (symbol ARGFX). At its peak, in 2005, Ariel held nearly $5 billion in assets; today, assets total $1.5 billion. Ariel landed in the bottom 15% of its category (funds that invest in midsize companies with a blend of both value and growth attributes) in 2003, 2005 and 2007, as well as in 2008. Now, like a pitcher who starts winning again after being plagued by arm trouble for years, Ariel is winning big in '09. Year-to-date through September 21, it gained 50.8%, putting it in the top 10% of its peer group.
A fallen fund needs to do more than run hot for six months after the end of a nasty bear market to erase years of poor results. But we think the dozen funds described below can sustain the improvement in their performance. You could make a case that with their assets substantially diminished, these funds are starting over -- but as known quantities with proven managers at their helms.
Return from March 9 through September 21, 162.3%; year-to-date return, 77.9%; five-year annualized return, 0.9%.
Manager Scott Barbee is so resolute about paying rock-bottom prices for small-company stocks that he had a pile of cash and a blank buy list during the last bull market. That hurt performance. But by last winter, stocks had become so cheap that Barbee's buy list held 800 names -- most of them highly indebted companies whose shares traded, on average, at 30% of book value (assets minus liabilities).
When the credit crisis eased, the kinds of stocks that Aegis held went the wildest. Despite the gains, Aegis's holdings still traded at just 56% of book value in mid September, says Barbee. That compares with an average of 75% over the life of the fund and 118% currently for the Russell 2000 index of small-company value stocks. He modestly calls Aegis Value "more of a passenger instead of one of the drivers" during this great run, but the fund took its seat at the right time.
Return from March 9 through September 21, 130.8%; year-to-date return, 50.8%; five-year annualized return, -1.5%.
Ariel founder John Rogers has a co-manager and a big staff, but you have to wonder whether he was better focused before one of his buddies, Barack Obama, became president. Other than eschewing tobacco and weapons stocks, Ariel's grab-bag of holdings doesn't follow any theme except that most trade at fairly low price-earnings ratios.
The results are great this year because Ariel made some sound buys at low prices. In anticipation of an economic recovery, the fund's team had the guts to buy blasted-out shares of such industry leaders as Royal Caribbean (RCL), the cruise operator, and CB Richard Ellis (CBG), a global provider of commercial real estate services. If you think the economy is on the mend, you might want to put some money into Ariel.
Return from March 9 through September 21, 67.2%; year-to-date return, 38.1%; five-year annualized return, 0%.
Fidelity has so many funds that a small laggard may escape scrutiny. Mid Cap Growth, with $198 million in assets (bus fare at Fidelity), has had a series of managers over the years. The latest, Steve Calhoun, a 15-year Fidelity veteran who took over at the start of 2009, transformed Mid Cap Growth from a closet index fund to a more concentrated one, with fewer than 100 holdings.
That kind of a transition means selling and taking a lot of losses in a down market, so the fund's record got ugly. In theory, a small fund with fewer holdings is riskier than a larger, more-diversified fund. But if Calhoun keeps making good decisions, Mid Cap Growth could reward risk-tolerant investors.
Return from March 9 through September 21, 94.2 %; year-to-date return, 44.7%; five-year annualized return, 0.2%.
Masters hires a bunch of subadvisers -- often people with top pedigrees at their primary funds -- to manage part of each of its funds. One member of Smaller Companies' team of managers is Bob Rodriguez (see Racing Toward Disaster?), who is worried about the economy and has been selling stocks lately in his FPA Capital fund.
Another is Bill D'Alonzo, who has done well over the years at the Brandywine funds. But despite its impressive roster, each year from 2005 through 2008 Masters' Select Smaller Companies recorded below-average performance in its category (small-company growth funds) . If the economy continues to perk up, the fund, which is loaded with consumer and technology stocks, should continue its rejuvenation.
Return from March 9 through September 21, 64.5%; year-to-date return, 27.9%; five-year annualized return, 2.3%.
Thirty years ago, this was one of the nation's most prominent no-load stock funds. The $1.4-billion fund is managed, now as then, by founder Albert Nicholas, who invests mostly in midsize companies that he considers cheap relative to earnings and growth prospects, then holds them for a long time.
The fund holds few tech or financial stocks, but it has heavy weightings in health care, retail and rust-belt manufacturing companies. Because of this conservative approach, Nicholas Fund looked antiquated when jazzier sectors led the market in the 1990s and early 2000s. Lately, however, it has benefited from the signs of a tentative recovery in consumer confidence and economic growth.
Oakmark Fund: Return from March 9 through September 21, 83.7%; year-to-date return, 35%; five-year annualized return, 1.9%. Oakmark Select: Return from March 9 through September 21, 84%; year-to-date return, 43.2%; five-year annualized return, 0.03%.
Readers of Kiplinger.com know why and how Bill Nygren and his mates at the Oakmark funds blew their terrific long-term records (see Where Oakmark's Bill Nygren Went Wrong). Free of such portfolio-killers as Washington Mutual, the Oakmark funds have had a good run in 2009.
Select typically owns fewer than 20 stocks distilled from the broader list at Oakmark Fund. If you believe Nygren & Co. have learned from their mistakes -- and there's every reason to think they have -- you may want to add one of these value funds to your portfolio.
Return from March 9 through September 21, 49%; year-to-date return, 17%; five-year annualized return, 2.34%.
Like Nicholas, Sequoia was once one of the nation's best-known stock funds. But it didn't accept money from new investors from 1982 until 2008 and, as a result, fell off the radar screens of many advisers and analysts. In the middle of this decade, its disappearance might have been just as well: From 2003 through 2006, Sequoia placed in the bottom 5% of the large-blend category three years out of four. Before that, its record was spectacular, and the fund performed relatively well in 2007 and 2008 (it lost only 27% last year, compared with the 37% loss of Standard & Poor's 500-stock index).
Like Oakmark's Nygren, Sequoia's Robert Goldfarb and David Poppe buy shares of a small number of top-notch companies at depressed prices and wait indefinitely for the stocks to appreciate. Performance has lagged this year because Berkshire Hathaway, Sequoia's largest holding by far, hasn't kept up with the market's rebound. Once Berkshire gets back on track, Sequoia should charge ahead.
Return from March 9 through September 21, 107.5%; year-to-date return, 46.4%; five-year annualized return, 3.2%.
A favored small-cap value fund in the 1990s, Skyline has been a mediocre performer this decade and has seen its asset base shrink from a peak of $589 million to $255 million. The fund's strong comeback since stocks bottomed in March owes to a heavy weighting in companies that are riskier and more leveraged than those in the typical small-company value fund.
Although Skyline's three managers have been in charge only since 2005, all have been with the firm that runs the fund for at least ten years. As long as the kinds of stocks it owns remain popular, there's no reason Skyline cannot regain its stature as one of the better small-value funds.
Return from March 9 through September 21, 80.2%; year-to-date return, 38%; five-year annualized return, 0.7%.
Here's yet another fund that trailed its peers more often than not from 2003 through 2008. Longer term, though, Wasatch has a fine record of analyzing stocks of fast-growing small companies. So it may turn out that Core Growth's 2003-08 performance is the fluke, not this year's results.
Yacktman Fund: Return from March 9 through September 21, 99.9%; year-to-date return, 48.9%; five-year annualized return, 7.6%. Yacktman Focus: Return from March 9 through September 21, 100.3%; year-to-date return, 51.7%; five-year annualized return, 8.9%
Coke, Pepsi, Pfizer, Microsoft -- the father-and-son team of Donald and Stephen Yacktman buy stuff like this when their share prices are depressed. But the pair also screen for companies with price-earnings or price-to-book-value ratios so low that either the firms are teetering dangerously close to bankruptcy or their stocks represent astounding bargains.
This combination tends to produce lousy results in technology-fueled bull markets and other periods of irrational exuberance. But it worked wonderfully to avoid heavy losses in 2008 and to deliver strong gains in 2009. Don Yacktman has taken his share of criticism for being too conservative in good times, but he's the kind of manager you trust with your money in uncertain times. Focus holds slightly fewer stocks than Yacktman Fund, but the two track each other so closely that there's not much to choose between them.
Kosnett is the editor of Kiplinger's Investing for Income and writes the "Cash in Hand" column for Kiplinger's Personal Finance. He is an income-investing expert who covers bonds, real estate investment trusts, oil and gas income deals, dividend stocks and anything else that pays interest and dividends. He joined Kiplinger in 1981 after six years in newspapers, including the Baltimore Sun. He is a 1976 journalism graduate from the Medill School at Northwestern University and completed an executive program at the Carnegie-Mellon University business school in 1978.
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