Muhlenkamp Fund Falls on Hard Times

The past few years have been unforgiving to Ron Muhlenkamp. His Muhlenkamp fund (symbol MUHLX), a member of the Kiplinger 25, has fallen 3% in 2007 through October 31. That trails Standard & Poors 500-stock index by a whopping 14 percentage points. Over the past three years, his fund gained only 8% annualized, lagging the index by an average of five percentage points per year.

Over ten years, Muhlenkamp sports a fine record -- up an annualized 10%, an average of three points a year ahead of the S&P -- but clearly he's stumbled badly in recent years. "I held housing [stocks] too long," Muhlenkamp says ruefully.

He made money for shareholders during the housing boom by investing in homebuilders, such as NVR (NVR), and mortgage lenders, such as Countrywide Financial (CFC), but he failed to eject these holdings before the housing and housing-related credit-market collapse.

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Muhlenkamp, a keen economic observer, says his key error was failing to observe that mortgage originators were increasingly making loans to customers with shaky credit records even as interest rates were moving up in 2005-2006.

What now? Muhlenkamp expects a soft landing for the U.S. economy -- 2% to 3% growth -- rather than a recession in 2008. But he's shifting his portfolio away from financials and makers of long-lasting products aimed at U.S. consumers and moving toward capital-goods producers.

"I want capital goods made in the U.S. and shipped to the rest of the world," he says, noting that a falling dollar and stronger economic growth overseas is shifting purchasing power to foreign buyers and away from American consumers.

For example, he added Boeing (BA) and Corning (GLW) to the portfolio in the third quarter and increased his holding of Cisco Systems (CSCO). "I'm selling housing and buying Cisco," he says.

He's bullish on demand for oil and gas but finds petroleum prices difficult to forecast. Thus, he's focusing on investing in companies with the capacity to pump greater volumes, as well as equipment and service companies that serve the oil patch. He likes Anadarko Petroleum (APC) and Devon Energy (DVN) and exporters of heavy equipment such as Caterpillar (CAT) and Terex (TEX).

As with many fund managers, Muhlenkamp is rejiggering his portfolio to benefit from the crumbling U.S. dollar.

Given the fund's poor performance this year, I wouldn't recommend buying it. But if you already hold shares, you might give Muhlenkamp more time to turn things around, given his past record of success. In the meantime, Kiplinger's Personal Finance will be re-evaluating the standing of Muhlenkamp fund -- as well as the 24 others -- on the Kiplinger 25 list, which will be updated next spring.