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These Core Funds Still Have Real Merit

Take a long-term view with these large-blend funds.

William Samuel Rocco, 02/17/2009

It's now 16 months since U.S. equities began their slide on Oct. 9, 2007, and the damage has been severe and widespread. The S&P 500 Index has plunged 43.8% since then, while the more expansive the MSCI U.S. Broad Market Index is down a bit more. Meanwhile, every sector has taken a sizable hit, with the most resilient ones--health care and utilities--losing around one fourth of their value and the hardest hit ones--industrial materials, media, and financial services--losing half to two thirds of their value. Consequently, it comes as little surprise that the average large-blend fund is down 44% since Oct. 9, 2007.

To be sure, several topnotch large-blend funds have fallen far less than that over the past 16 months. Vanguard Dividend Growth VDIGX has declined a relatively modest 30%, buoyed by skipper Don Kilbride's decision to go light on financial stocks and his emphasis on industry leaders with strong balance sheets, solid growth prospects, and reliable payouts. FMI Large Cap FMIHX has lost 11 percentage points less than the large-blend norm, as its managers' dedication to a select set of high-quality names and attention to downside protection has been helpful. And Sequoia SEQUX has been able to limit its losses to 34%, thanks to Bob Goldfarb and Mark Poppe's willingness to hold cash as well as the quality of their stock selection.

But it's also true that a number of previously impressive large-blend funds have suffered oversized losses during the meltdown, including Clipper, Hartford Capital Appreciation, and Thornburg Value. That make us think it's a good time to scrutinize the three funds in order to figure out what has caused their underperformance and whether their long-term appeal remains intact. Here are the details on each.

Clipper CFIMX
Chris Davis and Ken Feinberg, who took the helm in early 2006, pursue great companies whose shares are temporarily depressed at this fund just as they have at Selected American Shares SLASX for more than a decade. They also tend to favor the same sectors here as they do there. But this fund, which currently owns 25 names and has 49% of its assets in the financial sector, is much more focused issuewise and sectorwise than that offering and nearly all other large-blend offerings. And that concentration has been a huge problem during the downturn, as the financial sector has suffered much more than any other and Davis and Feinberg have made some awful picks in the sector. Thus, the fund has plunged 56% since Oct. 9, 2007. It also struggled earlier in their tenure, so its returns on their roughly three-year watch are terrible. Nonetheless, there still are grounds to believe that this fund remains a good long-term holding for investors who can handle the risks of owning a focused offering. Davis and Feinberg have produced superior long-term returns at a similarly compact separate account and at Selected American Shares (which has fallen 47% during the downturn). And this fund has the ongoing advantage of a low expense ratio.PAGEBREAK

Hartford Capital Appreciation ITHAX
Lead manager Saul Pannell, who employs an eclectic style and readily buys stocks in bunches, has made some poor picks and favored some of the worst sectors. (American International Group AIG was one of his top picks, and he has built an oversized stake in metals and other materials stocks.) Pannell also pays much more attention to overseas opportunities than most of his peers do--this fund currently has 21% of its assets invested abroad--and foreign stocks have suffered much more than domestic ones during the meltdown. Consequently, this fund has lost half its value over the past 16 months. That's an excruciating loss--and it will take some time to overcome--but there are several reasons to be bullish about the long run here. Funds need to differ from their peers in order to post outstanding returns. Pannell has produced good results in all kinds of climates in the past, so this fund has crushed its average peer and the S&P 500 Index over the past decade. Finally, Pannell, who has 34 years of investment experience, is quite seasoned as well as quite talented, and he's supported by Wellington's deep and skilled team of industry analysts.

Thornburg Value TVAFX
Bill Fries, Ed Maran, and Connor Browne run a compact portfolio of 40 to 50 names and let their sector weights fall where they may as they pursue basic value stocks, consistent earners, and emerging-franchise issues. Both of these traits have hurt during the downturn. Some of their financial picks have tanked, including Allstate ALL and UBS UBS (which they sold in early 2008). They made some mistakes in other sectors as well, such as Gazprom OGZPY, Corning GLW, and Dell DELL. And they've invested significantly more than the large-blend norm in the media sector, which has been the second worst overall. As a result, this fund has fallen 50% since Oct. 9, 2007. While that decline is really painful, the long-term picture is still bright here. The managers produced strong results with their distinctive approach in the late-1990s rally, the early-2000s sell-off, and the mid-2000s surge, so they clearly have considerable skill and this fund boasts impressive long-term returns. And Fries and two other comanagers have delivered excellent short-, mid-, and long-term results at Thornburg International Value TGVAX with essentially the same strategy as is used here.

William Samuel Rocco is a fund analyst with Morningstar.

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