The housing collapse and the accompanying credit crisis made 2007 a particularly treacherous year for stock funds, particularly those that hunt for undervalued companies.
With so many funds -- both obscure and well-known -- snagged by the effects of the mortgage meltdown, it's hard to single out one as the year's biggest disappointment. So instead we'll nominate three strong candidates. We base our decisions not just on how the funds performed but also on how much they failed to live up to expectations.
Two of our choices are concentrated, value-oriented funds; the third is a large-company growth fund that operated in one of the year's best-performing sectors.
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On the surface, Clipper fund's numbers aren't so horrible. Year-to-date through December 17, the fund (symbol CFIMX) lost 2%. That trailed both Standard & Poor's 500-stock index and the average large-blend fund (those that invest in large-company stocks with a blend of growth and value attributes) by six percentage points.
Clipper also lagged Selected American Shares (SLASX) by five percentage points, and that's the major reason we consider Clipper's results so substandard.
The two funds share the same managers, Chris Davis and Ken Feinberg. We think so highly of them that we include Selected in the Kiplinger 25.
When Davis and Feinberg took over management of Clipper early in 2006, they brought with them a longstanding affinity for financial stocks. Although financials account for a fairly high 37% of Selected's assets, they represent a whopping 48% of Clipper's 20-stock portfolio.
When the mortgage crisis hit over the summer, Clipper's big stakes in stocks such as American Express (AXP), American International Group (AIG) and Merrill Lynch (ML) sank and dragged down the fund's performance.
Davis and Feinberg have always argued that "the financials are a much more diverse group than they appear," says Morningstar analyst Dan Culloton. "But in a huge crisis like this, where there's a lot of blood on the streets, a lot of these stocks will tend to move in concert, and the fund will get hurt."
The 2007 performance of Oakmark Select was undeniably dreadful. You don't have to take our word for it. That's how the fund's longtime lead manager, Bill Nygren, referred to it in a letter to shareholders.
How dreadful? Through December 17, the fund was down 14%, trailing both the S&P 500 and the large-blend category by a jaw-dropping 18 percentage points.
Select's performance shows that if you make big bets in a concentrated portfolio, you'd better be right. The fund (OAKLX), also a member of the Kiplinger 25, typically holds only 20 stocks, but it entered 2007 with an enormous stake in Washington Mutual (WM), which accounted for 15% of assets. Bad move.
Shares of the giant savings bank and mortgage lender, $46 at the end of 2006, closed on December 27 at $13.54. The mortgage crisis also pushed down shares of Pulte Homes (PH) and H&R Block (HRB), two other Oakmark Select holdings.
Nygren says the financial stocks did far worse than the underlying businesses: "Our consumer and financial businesses have had somewhat negative performance and negative performance has been heavily magnified in negative stock price performance."
Nygren says he has weathered previous storms by sticking with his convictions, assuming that problems afflicting a particular sector are usually not as bad as panicked investors think they are. But this year's mortgage upheaval was different.
He acknowledges: "So far, the way the housing decline is unfolding, the people who were panicking were right this time." From their peaks, used-home prices have, on average, fallen about 10% and new-home prices have dropped an average of 13%, declines that Nygren says are "unprecedented and something we didn't think was likely."
Oakmark Select was also hurt by what it didn't hold: industrial and energy stocks, which Nygren says were overvalued.
But Nygren is standing pat: "We believe the stocks we own are the best stocks to be positioned for, not just for '08, but for the next three to five years."
It's been a good year for Fidelity's stock funds. Most of them are beating their benchmarks, and two of Fidelity's most prominent funds -- Magellan (FMAGX) and Contrafund (FCNTX) -- are blowing away their rivals. The same can't be said for Fidelity Large Cap Growth (FSLGX).
Through December 17, the fund was flat for the year. It trailed the S&P 500 by four percentage points and the average large-company growth fund by 11 points. Large Cap Growth, which, with $175 million in assets is one of Fidelitys smaller funds, simply should have performed much better, given its position in one of the market's best-performing areas of '07.
It turns out that the fund's holdings didn't quite live up to its name. As of last April, under previous manager Bahaa Fam, the fund had 43% of its asset in small and midsize companies, according to Morningstar.
But Edward Best, who assumed the reins last June, says he's been increasing the fund's emphasis on true big companies. "We've been working hard to try to get what we perceive as the most attractive large-cap growth stocks into our fund," says Best.
Among those, he says, are Exxon (XOM), Microsoft (MSFT) and Lockheed Martin (LMT). As part of the repositioning, Best also sold the fund's stakes in homebuilding stocks, including KB Homes (KBH) and Ryland Group (RYL), which also hurt performance earlier in the year.
By Laura Gilcrest, contributing writer
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