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What to Make of Four Funds That Blew Up in 2008

We still think these funds have what it takes to be long-term winners.

William Samuel Rocco, 02/03/2009

Growth funds, as any of you who own one are no doubt painfully aware, incurred excruciating losses in 2008's equity meltdown. For starters, nearly all growth managers pay considerable attention to the software, semiconductor, energy-services, and a few other industries that got hit especially hard last year. What's more, many growth skippers rely on racy or momentum-oriented strategies, and those sorts of approaches backfired in 2008. Large-growth funds plunged an average of 41% in 2008, as a result, while the average losses for large-blend and large-value offerings were several percentage points less. And mid-cap growth and small-growth funds on average plummeted 44% and 42%, respectively, whereas mid-cap blend, mid-cap value, small-blend, and small-value offerings averaged losses well less than 40%.

Of course, there were many well-known and first-rate growth funds that held up far better than their peers last year. For example, Vanguard PRIMECAP VPMCX and Aston/Montag & Caldwell Growth MCGFX both lost about 9 percentage points less than the large-growth norm, as their managers made more than their share of resilient health-care and other picks. Hartford Midcap HFMCX dropped 36%, while its average peer fell 44%, due to management's move away from the energy sector and its stock selection in other areas. And Buffalo Small Cap BUFSX lost 12 percentage points less than the small-growth norm, thanks to the names and sectors that its managers avoided as well as those that they favored.

However, there also were a number of prominent and previously successful growth funds that suffered considerably more than most of their rivals in 2008. And we thought that it would be worthwhile to take a close look at four such funds--Calamos Growth, Columbia Acorn Select, Bridgeway Aggressive Investors 1, and Janus Venture--to determine what caused them to blow up and whether they remain superior options for growth fans. Here is the scoop on each.

Calamos Growth CVGRX
This fund finished in the large-growth category's cellar in 2008 with a 50% loss. Among other things, it got punished for its hefty position in the hardware sector (which incurred more damage than most others) and its considerable exposure to mid- and small-cap growth companies (which suffered more than large-cap ones). But this fund's managers normally build sizable sector overweights and make full use of the market-cap spectrum as they pursue fast growers, and they've executed their relatively bold strategy skillfully in a variety of conditions in the past. Indeed, thanks to that past success, this fund's 10-year and 15-year annualized returns rank among the large-growth group's very best (and they would also stack up quite well in the mid-growth group). And that record, along with our confidence in management and its strategy, makes us think that this fund can bounce back and that it remains a good long-term option for aggressive investors.PAGEBREAK

Columbia Acorn Select LTFAX
The downside of this fund's concentrated approach was painfully clear last year. Manager Ben Andrews runs a relatively compact portfolio of 40 to 60 names, so every holding has a significant impact on performance. A number of his picks took nose dives in 2008, including Janus Capital Group JNS (which lost three fourths of its value) and the energy-equipment firm FMC Technologies FTI (which lost nearly three fifths of its value). Consequently, this fund plunged 49% and finished in the mid-growth group's bottom quintile last year. That really stings--and it will take some time to overcome such a loss--but Andrews has produced good returns in the past, and this fund has posted strong overall results since its late 2000 inception. Further, Andrews is part of one of the deepest and most talented teams of small- and mid-cap specialists around, and several other Columbia Acorn offerings have been winners over the long run. Therefore, we continue to believe that this fund remains a superior option for investors who are seeking some long-term pop for their portfolios and who can handle the volatility that comes with its focused nature.

Bridgeway Aggressive Investors 1 BRAGX
This quantitative fund (which is closed to new investors) and Bridgeway Aggressive Investors 2 BRAIX (which is younger, nearly identical, and open to new investors) lost 12 and 11 percentage points more than the mid-growth norm of 44%, respectively, in 2008. The funds' models do incorporate a valuation component, but they place greater emphasis on growth and momentum factors. The latter factors led the funds to load up on industrial-materials and energy stocks in recent years--they had roughly triple the group norm in the first and double the group norm in the second as of Sept. 30--and that backfired as such stocks cratered along with commodity prices late last year. While their quant-driven approach wasn't nearly up to the task in 2008, we do think that the funds have what it takes to recover and deliver the goods over the long haul. The funds' models have succeeded in all sorts of conditions in the past, and Bridgeway Aggressive Investors 1 boasts an excellent long-term record. The management team is savvy as well as seasoned, and it has shown a commitment to--and knack for--adjusting the models. For all these reasons, we continue to be bullish about the long-term futures for both and continue to believe that they're good supplemental options for risk-tolerant investors.

Janus Venture JAVTX
A few things went wrong for this closed small-growth fund in 2008. It had an overweighting in the especially hard-hit software sector, for example, while some of skipper Will Bales' picks in other sectors got beaten up pretty badly. As a result, this fund fell more than 50% and finished behind 95% of its category rivals in 2008. That's a terrible loss, and it will take some time to overcome, but this fund has several strengths that bode well for the future. Bales, who has been at the helm since early 1997, is much longer serving than most of his peers and thus has seen a far broader array of market conditions. His strategy, though aggressive, is inherently sound, and he has made some sensible modifications to it over the years. And this fund has comfortably outpaced its average peer on his tenure. All this, plus the fact that this fund has the advantage of a very low expense ratio for a no-load small-cap offering, makes us think that shareholders should stay the course here.

William Samuel Rocco is a fund analyst with Morningstar.

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