Extreme Times, Disappointing Outcomes

Losses are losses, right? Wrong. Though losses run deep across the board in mutual funds, the collapses suffered by certain funds are particularly disappointing.

In order to locate those unpleasant cases, we've taken a deeper look at what caused the pain for some funds and have matched the results with each fund's strategy and process to get a clearer picture of the cause. The toughest underperformance for us to swallow came in funds that should have--given their strategies--done better in tough times, if not in absolute terms, at least versus their peers.

Tough times haven't led us to change our tune on every fund that has been disappointing. Poor performance alone may lead us to revisit our opinion, but it is certainly not an automatic trigger for a change in our stance. In fact, we're standing behind funds we think have a winning combination of management, strategy, fees, and stewardship to excel over a full market cycle.

There are others, however, whose dismal showings have exposed weaknesses in their approaches. We've cooled on the following three funds as a result.

Janus Worldwide JAWWX
We became fans of Janus Worldwide soon after manager Jason Yee took over in 2004. Yee had successfully managed Janus Global Opportunities JGVAX since 2001 (it was one of few Janus funds to do well in that downturn) and put together a distinctive concentrated portfolio with a decided value tilt here. Yee seemed to be cut from a different cloth than other Janus managers. His portfolio didn't share the aggressive-growth attributes that have come to characterize Janus' other flagship funds and Worldwide's old ways. Cash flows, valuations, and enduring competitive advantages were all a part of Yee's lexicon, and the portfolio took on a refreshing new look.

Times were tough from the get go, however, as Yee positioned Worldwide conservatively when emerging markets and energy drove its peers and several Janus siblings to big gains. He couldn't justify the valuations and kept the fund out of those heated corners of the market. We were glad to see the fund sticking to its knitting, though, even if it meant missing some of the upside. We expected the fund would eventually have its day in the sun when speculation lost its attraction and the market's favor rotated out of emerging markets and energy.

Well, risk-taking is no longer in favor and the market has indeed punished emerging-markets and energy stocks, but this fund continues to lag. What's worse, this environment has poked holes in several of Yee's picks. In 2008, he underestimated the risks facing its financials holdings, such as investment bank UBS UBS, government-mortgage lenders Fannie Mae FNM and Freddie Mac FRE, and insurance giant American International Group AIG, which all tanked as the financial crisis unfolded. In addition, expected improvements at top holdings such as Dell DELL and Yahoo YHOO have yet to materialize. The fund has lost 51% for the 12 months through March 3, 2009, and lags more than half of its world-stock peers. PAGEBREAK

We would've expected a much stronger showing in both absolute and relative terms, given Yee's approach. His missteps have dimmed our confidence in the fund's ability to be a standout under his watch.