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Do Bear-Market Veterans Manage Better in a Downturn?

Survivors from the 1970s are still applying prudent approaches.

Bridget B. Hughes, 03/24/2009

As the markets continue to crumble, many mutual fund managers are scratching their heads. They say the markets aren't recognizing some companies' good fundamentals, including resilient earnings figures, strong balance sheets, and stable cash flows; and, they say, it's simply fear that has gripped all corners of the market. In coming to grips with their own funds' performance, many note that the current stock market environment is unprecedented in our professional lifetimes (unless, of course, you are 100 years old and worked during the crash of 1929).

Technically, those managers are right in at least one regard: The S&P 500 Index has fallen nearly 55% since Oct. 9, 2007--an outcome worse than that of any other bear market since 1929 (when the Dow Jones Industrial Average plummeted more than 80% in less than three years). But there have been some periods with results similarly gnarly to the most recent drop, including the bear market that began in January 1973, which ultimately saw the S&P 500 fall nearly 50%. Granted, there were some other differences back then, including higher inflation and a drawn-out decline. (It's been faster this time around.)

Still, we wondered if funds led by portfolio managers that ran money in the 1970s have been better off in the latest downturn.

There aren't many managers that have run the same mutual fund for that long (though more have been investing that long) and some that have are part of a team of managers on those funds. Below is a table showing which stock funds have the longest-tenured managers and some details on some of the best-known offerings.

 Sectors by Market Cap % Uncertainty
Years on Fund

Return 10/9/07-3/9/09 USD

Total Return Anzd 10-Yr

% Cat Rank

American Growth AMRGX
Robert Brody
-13.27 99
Franklin Growth FKGRX
Jerry Palmieri
-1.77 14
Franklin DynaTech FKDNX
Rupert H. Johnson, Jr.
-1.23 10
Nicholas NICSX
Albert O. Nicholas
-4.17 94
American Funds American Mutual AMRMX
James K. Dunton
0.08 17
Armstrong Associates ARMSX
C.K. Lawson
-1.41 12
Valley Forge VAFGX
Bernard B. Klawans
1.03 10
Pearl Total Return PFTRX
David Stanley
4.21 --
Stratton Multi Cap STRGX
James W. Stratton
1.61 5
Royce Pennsylvania Mutual Inv PENNX
Charles M. Royce
5.20 14
Natixis CGM Advisor Targeted Eq NEFGX
G. Kenneth Heebner
-1.26 10
Dodge & Cox Stock DODGX
John A. Gunn
1.68 5
S&P 500 Index
Data as of 03-09-09.

Franklin Growth FKGRX
Jerry Palmieri started on this fund in the mid-1960s. During the bear market that began in 1973, the fund lost nearly 48%--about in line with the rest of the market. But since then the fund has generally held up much better than the market in tough times. In 1987's quick drop, Palmieri kept the fund's losses to less than 20% between late August and early December. (The market dropped 33% during that period.) In 1987, Morningstar named Palmieri its first Manager of the Year, as he led the fund to a near-20% gain. One of Palmieri's tricks over the years has been to build cash, with varying degrees of success, but somewhat surprisingly, that's not what's helped the fund since late 2007. Rather, Palmieri's approach has kept him largely out of financial stocks and energy names--two areas that have been particularly hard-hit lately.PAGEBREAK

Nicholas NICSX
Manager Ab Nicholas, who started his investment firm in 1967 with Dick Strong, has been running this fund since its inception two years later. During the 1970s bear market, this fund was burned badly, losing more than 70% of its value. Given that monstrous setback, it's no surprise that the fund has since been characterized by its defensive attributes. (Plus, Strong, whose investment philosophy was more growth-oriented, left Nicholas in 1972 and started his own firm in 1974.) While Nicholas Fund has proved to be a steady-Eddie--with less volatility, a lack of technology stocks, and an emphasis on valuations--it hasn't generated compelling returns over the long haul.

American Funds American Mutual AMRMX
James Dunton has been part of this portfolio's management since 1971. Because each of the American Funds is run as a collection of independently run subportfolios, it's tougher to gauge the impact of just one of its managers on the overall portfolio. But all of the American Funds are characterized by a moderate strategy, with a contrarian streak, a sensitivity to valuations, and a customary stash of cash. In the 1970s bear market, the fund kept its loss to less than 33%, and the fund has continued to be a stable offering with good bear-market performance. With a limited stake in high-flying technology and telecom stocks, for example, it admirably lost less than 8% between early 2000 and late 2002. More recently, its regular bond stake and very limited investments in financials have worked to its advantage. Meanwhile, it has been a strong long-term performer.

Royce Pennsylvania Mutual PENNX
This small-cap fund lost nearly 73% of its value in the 1973-74 bear market, though to be fair, manager Chuck Royce took over the fund two months after the decline began. It's thus no surprise that Royce has since regularly touted the benefits of a diverse portfolio and emphasis on valuations; these days, capital preservation and finding a way to buy lower-risk small caps are definite priorities. Since mid-October 2007, the fund is off 56%--a bit worse than the setback suffered by the S&P 500 but better than that of the Russell 2000 Value Index, which is a more-appropriate benchmark and has lost a bit more than 59%.

Dodge & Cox Stock DODGX
John Gunn's tenure on Dodge & Cox Stock begins after the 1973-74 bear market ended--he started on the fund in 1977--but Gunn was hired in 1972, so he experienced the drubbing while at the firm. Also, as the firm's chairman and chief executive officer, Gunn is part of a collaborative group of investment professionals, so it's tough to say how large an impact he has on the portfolio. As at the American Funds, though, Dodge & Cox's patient, against-the-grain investment approach had tended to keep its performance moderate, and it performed exceptionally well during the early 2000s bear market, when it lost less than 3%. In this latest downturn, however, several ugly financial stocks changed the story here. It has lost 62%, but we're confident it will regain its luster over the long haul.

Bridget B. Hughes is a fund analyst with Morningstar.

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