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
The virtues of this team's approach were on full display in 2009. It has one of the highest developing-markets stakes in the category, so it was sitting right in the sweet spot for the rally that particularly favored emerging markets over more-developed countries. The managers were also very timely with cash. The fund tends to keep cash at around 10% and did so in 2008, which helped it blunt the blow of that year's sell-off. However, it had reduced that stake to 5% by September 2009 and captured more of the market's rally. The team showcased similar good judgment and timing with financials stocks. It held an underweight position during the depths of the trouble in 2008, which helped it avoid some of the worst losses, but increased its stake in the beaten-down sector in time to benefit from the rebound. Another virtue to note, and perhaps the most important, is what the managers didn't change during the rocky times. They stuck with and even added to many of their emerging-markets investments in the depths of the panic in 2008. By not cutting and running, the managers positioned the fund to benefit in one of the most explosive asset classes of 2009.
The fund's all-weather strength isn't too surprising, given the seasoned and deep team backing it. The newest member of this eight-person management roster has been on the fund for 13 years, and the average tenure across the board is 20 years. Capital Research, advisor of the American Funds, is well known for attracting, developing, and keeping talented managers for their entire careers. That kind of manager stability and experience is rare and a sign of great stewardship. The results speak for themselves. The fund is in the top decile of its peer group for the trailing three-, five-, 10-, and 15-year periods. It has spent seven of the past 10 calendar years in the top quartile of foreign large-blend peers. Its worst relative showing in that stretch came in 2006 when the fund gained 22% but landed in the bottom 20% of peers. That's hardly a failure.
The Team at Loomis Sayles Bond
2009 Return/Percentile Rank: 36.8%/14th
It's difficult to laud managers Dan Fuss, Kathleen Gaffney, Matthew Eagan, and Elaine Stokes for their success in 2009 without first acknowledging their struggles in 2008. The team's contrarian-tinged approach had never faced an environment as challenging as 2008, when this fund was stung by a painful 22% loss. After playing smart defense in the early stages of the credit crisis in 2007, the team began bargain-hunting in the corporate-bond arena before late 2008's financial crisis set off a wave of panic and deleveraging that resulted in worst-ever price declines for all types of corporate bonds.
But despite all the commotion, Fuss and team managed to keep their cool, whether by sticking with battered and controversial holdings when they were convinced the market's fears were overblown, or by picking up solidly underpinned investment-grade bonds when buyers were few and far between. As panic subsided and corporate bonds staged a rally in 2009, this fund was in the market's sweet spot: It managed to roar past most multisector-bond peers, with a 37% gain in 2009. The team's currency moves and forays into downtrodden and more-obscure fare such as convertibles and commercial mortgage bonds have also paid off this year.
The fund's resurgence in 2009 highlights the virtues of Fuss and team's patient mind-set, and the fund's peer-topping average annual gain of 8.7% over the past decade shows just how rewarding their strategy can be over the long haul. An approach this daring wouldn't inspire confidence if it weren't in dependable, well-supported hands. On that front, we take comfort that Fuss and his comanagers form a cohesive unit that has worked together for more than a decade, and they benefit from the work of Loomis Sayles' reputable cadre of corporate credit analysts, among others. Fuss has also demonstrated his conviction in the process by investing substantial sums of his own money alongside shareholders'.
* Miriam Sjoblom, associate director of fund analysis, contributed to this article.
Karen Dolan is Morningstar's director of fund analysis.