These mutual funds have far more than their recent success going for them.
The managers of core domestic-equity funds have faced an exceptionally turbulent environment in the first half of 2009. They confronted terrible conditions this winter. The U.S. market continued to plummet through early March, as ongoing troubles in the financials and other sectors, worries about the global recession and the government responses to it, and other issues caused investors to remain quite leery of equities. Consequently, after plunging in 2008, large-cap funds dropped an average of 22% in 2009 through March 9.
But the skippers of large-cap offerings have encountered a very favorable climate in recent months. The U.S market has rebounded sharply this spring. Simply put, the plethora of compelling bargains, the improvements made by certain banks and other corporations, and a growing belief that the worst of the global recession was over--or, at least, that the end was in sight--induced investors to pursue stocks and to take on risk once again. As a result, core domestic-equity funds have jumped 37% from March 10 through June 26 on average.
Extreme volatility isn't all that these managers have had to deal with in the first half of 2009. There has been a considerable amount of sector rotation, as those that performed best early in the year have tended to lag in recent months and vice versa. The health-care sector suffered rather mild losses in the winter sell-off but has posted relatively modest gains this spring, for example, whereas the financials sector fell 50% through March 9 but is up more than 75% since.
Given the extent of these challenges, we thought that it would be instructive to examine a handful of prominent--and previously successful--large-cap managers who have earned topnotch results in the topsy-turvy first half of 2009 and see how they achieved their success. Here's what we found.
Two Proven Bargain-Hunters Deliver
After all the ups and downs, the average large-value fund has returned 2% for the year to date through June 26. But David Williams has guided Columbia Value & Restructuring UMBIX to a 14% return. Williams is an extremely patient investor who readily buys stocks in bunches and considers overseas opportunities as he looks for firms that can improve their profitability via reorganizations, management changes, or acquisitions. These tendencies have paid off nicely. He has stuck with his hefty stakes in the energy and industrial-materials sectors--which have bounced back sharply after struggling in 2008--and he made excellent picks abroad in those and other areas. Petrobras PBR is up 68% thus far in 2009, for example, while America Movil AMX is up 25%. And Williams' success this year is anything but a fluke. This fund has the best 15-year return in its group.
Meanwhile, David Kiefer and Avi Berg have produced a 14% gain at Jennison Value PBEAX. Kiefer and Berg are contrarians, and their late-2008 decision to add their stakes in then-beleaguered Goldman Sachs GS and Morgan Stanley MS has been a boon, because both names have returned more than 75% this year. Their stock selection has also been quite good outside the financials sector. Indeed, though most health-care issues have been sluggish in 2009, Mylan Laboratories MYL, which is one of their top-25 holdings, has thrived. And while they made some mistakes last year, their decision-making has been on the mark much more often than not overall, so this fund has posted superior returns on their watch.
Two Large-Blend Talents Shine
The typical large-blend offering has gyrated to a 5% gain this year. Mason Hawkins and Staley Cates have led Longleaf Partners LLPFX to a 23% return, though, by sticking to their principles. Hawkins and Cates run a concentrated portfolio of 20 to 25 names and resolutely stand by holdings through tough times when they believe the trouble is temporary. These traits stung in 2008, as they not only held on to their hefty positions in some energy companies that tanked but they also stuck with--and added to--their sizable stake in Sun MicroSystems JAVA as it sank. (They eventually got involved in the affairs of the company.) But their commitment has been a boon in the first half of 2009. Their energy picks have come roaring back, and Sun MicroSystems has soared 136% thanks largely to a takeover offer from Oracle ORCL. Although last year certainly wasn't the first time their style has caused short-term pain, Hawkins and Cates have earned a strong long-term record here.
Bill Fries, Connor Browne, and Ed Maran of Thornburg Value TVAFX have executed their distinctive strategy deftly in the first half of 2009. Fries, Browne, and Maran build atypical sector weights and consider mid-cap and foreign opportunities. They've made several winning picks in the relatively strong hardware and software sectors; DISH Network DISH and some of their other mid-cap names have thrived; so have some foreign holdings such as Gazprom OGZPY. Thus, this fund is up 19% for the year to date through June 26. Such results are nothing new here. Although the managers weren't at their best in 2008, this fund sports top-decile three-, five-, and 10-year returns.
An Accomplished Large-Growth Skipper Shines
The average large-growth fund has bounced its way to an 11% gain in the first half of 2009. But Joe Milano has earned a 23% return at T. Rowe Price New America Growth PRWAX. Milano has accomplished this feat through strong stock selection and by being willing to differ from the crowd. The software space is popular with large-growth managers, of course, but he has made more than his share of good choices in that thriving sector and emphasized the right names. (Apple AAPL, which is up more than 65% in 2009, is his top holding.) He has also made some terrific picks that most of his peers have missed. For example, he bought the aerospace company Goodrich GR and added to his stake in Whole Foods Market WFMI as they struggled in 2008, and the two stocks, which few large-growth offerings hold in significant amounts, have surged this year. This fund has earned excellent returns during Milano's seven-year tenure.
William Samuel Rocco is a senior fund analyst at Morningstar.
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