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Four Big Mutual Fund Surprises of 2009

Two happy surprises and two disappointments.

Russel Kinnel, 12/01/2009

What a remarkable time to be an investor. First, you suffer through the worst bear market since the Great Depression, then you experience one of the best spurts ever. The rally--Standard & Poor's 500-stock index soared nearly 63% between March 9 and Nov. 19--has been strongest among some of the areas that were hardest hit in 2008. In the fund world, this translates into the worst-shall-be-first effect: Many of last year's weakest performers are among this year's best. And many of last year's winners are this year's dogs (see bear-market funds, for instance).

Some funds, however, managed to perform well (on a relative basis at least) both this year and last, and others were stinkers both years. Let's look at some of these surprises.

The managers of Brown Capital Management Small Company BCSIX are remarkably patient. With annual portfolio turnover typically on the order of 10%, we can rule out the notion that they rode last year's best-performing sectors (the ones that lost the least) and then hopped onto real estate and China this year. In fact, the managers, led by Keith Lee, just held on to the same small but fast-growing companies they've had for years. This steady approach means they are likely to stick with a company even when it hits a pothole and are unlikely to sell a stock because it has risen a lot. The fund's lack of energy stocks helped it keep its losses to 30% in 2008; solid sales and profit gains among its holdings helped propel the fund to a nearly 35% gain this year. Brown Small Company's long-term record is excellent, although it achieves its returns in fits and starts.

Despite a torrent of correspondence questioning our intelligence and sanity (not to mention our morality), Morningstar kept Oakmark Select OAKLX on its list of Fund Analyst Picks last year. And, yes, 2008 was the year Washington Mutual, in which Select had an outsized position, withered and then was acquired for next to nothing. Yet even in 2008, managers Bill Nygren and Henry Berghoef beat the market and most large-blend funds by a small amount. PAGEBREAK

And so far this year, Select gained almost 50% through Nov. 19 as its debt-heavy but still-sound holdings came roaring back. In recent years, Nygren and Berghoef have shifted into more-traditional growth companies because they seemed so cheap. Although this looked like a poor move at first, the managers have been vindicated. Despite the WaMu gaffe, Nygren's record since launching Select in 1996 is miles ahead of the S&P 500. He hasn't lost his touch, and we're pleased we didn't toss him and Select overboard.

Turning to the disappointments, one of the biggest has been Vanguard Asset Allocation VAAPX. Mellon Capital Management allocates the fund's assets among the S&P 500, Barclays Capital Long U.S. Treasury Bond Index, and cash. Because Mellon leaned heavily toward stocks in 2008, the fund lost 36%, just 1 percentage point better than the S&P 500 did. This year, it gained nearly 18% through Nov. 19, about 4 points less than the index's rise, landing it in the bottom 17% of Morningstar's moderate-allocation category.

One problem is that the fund restricts its stock holdings to the S&P 500--not a good thing when big company stocks trail their smaller brethren. Moving 10% of the fund's assets from stocks to cash in the second quarter didn't help.

Bridgeway Aggressive Investors 2 BRAIX fell off a cliff in '08, sinking 55%. The fund gained 23% so far this year, but that still puts it in the bottom 18% of mid-cap growth funds.

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