The winners jumped on 2008's bargains to reap 2009's rewards.
The headlines are focused on how treacherous the 2000s were for investors, but the decade ended on a positive note, with most markets climbing in 2009. The upswing helped ease (though not erase) the effects of 2008's treacherous decline that extended through 2009's first quarter. For the full year, broad stock and bond market indexes posted gains, with the riskier asset classes, including emerging-markets stocks and bonds and high-yield debt, leading the pack.
Each year, Morningstar's fund analysts vigorously debate and vote on the nominees for these awards. This year posed a curious riddle because most managers topping the leader boards in 2009 experienced the worst losses in 2008 and are still under water for the three- and five-year periods. While the award has always been focused on the past calendar year, we've never simply chosen the highest-returning fund in the database. We favor those funds that have strong long-term risk-adjusted performance and have been good stewards of investor capital. Still, the award is intended to acknowledge managers' past achievements more so than serve as a forward-looking recommendation.
Bruce Berkowitz of Fairholme Fund
Fairholme manager Bruce Berkowitz shouldn't have had a great year in 2009, but he did. Technology and media were among the top-performing sectors, yet the portfolio held nothing in those areas. On top of that, it stashed an average of 17% in low-yielding cash. The fund still pulled off a stellar year, gaining 39.0%, which placed it 12.5 percentage points ahead of the S&P 500.
But Fairholme's returns in 2009 are even more impressive in light of its performance in 2008 and years prior. Many of 2009's fund leaders were the biggest losers in 2008. Yet, clawing your way back from a 50% to 70% loss takes a lot more than a 50% to 70% gain, rendering huge returns in 2009 unremarkable for funds that lost their pants in 2008. Berkowitz didn't face that struggle because he managed to keep Fairholme's loss to less than 30% in 2008, which was painful but well ahead of the fund's large-blend peers and more than 7 percentage points better than the S&P 500. And the fund notched top-quartile gains in seven of the eight calendar years prior to 2008, so it has showcased strength in a multitude of market environments.
The fund's performance in 2009 was the result of a complete portfolio overhaul the prior year. In the first half of 2008, Berkowitz drastically cut back the fund's large energy stake, which topped out at more than 34% of the portfolio in 2007. By the end of September, only 2.5% of the portfolio was invested in energy stocks. In its place, Berkowitz increased the fund's stake in health-care and defense stocks. Those moves have already paid off in spades.
Berkowitz and others at Fairholme are experiencing the fund's returns in full force. Fund filings show that the employees and officers of Fairholme Capital Management had more than $68 million invested in the Fairholme fund.
The Team at American Funds EuroPacific Growth
2009 Return/Percentile Rank: 39.1%/15th