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Four Funds That Can Capitalize on 2008's Turmoil

They have the cash and flexibility to take advantage of all the bargains.

William Samuel Rocco, 11/18/2008

This year's meltdown is far more extensive than the early 2000s' sell-off. Sure, most categories of diversified domestic-equity funds declined between 25% and 55% in aggregate from April 2000 through March 2003, and all types of international-stock offerings dropped between 28% and 65%. But real estate funds earned strong returns during that period, while small-value, utilities, and financials offerings eked out small gains and mid-value and natural-resources funds roughly broke even. And except for high-yield funds, which were flat, all categories of taxable and municipal-bonds funds were up between early 2000 and early 2003.

Conversely, all categories of diversified domestic-equity funds are down 32% or more for the year to date through Nov. 7, and all types of international-stock funds have declined 39% or more. The best-performing specialty category, health care, has fallen 23% this year. And all categories of bonds funds--except for short-muni and short-, intermediate-, and long-government offerings--are in the red since Jan. 1.

Hard as it may be to believe, though, there is a silver lining amid 2008's carnage. Due to the depth and breadth of the sell-off, plus the fact that many stocks and bonds with sound fundamentals and superior potential have gotten beaten down alongside all those with real problems or limited prospects, there are some extraordinarily attractive bargains out there. Thus, while this year's downturn has been incredibly painful--and it will take quite some time for most offerings to recover--it has created the potential for funds to purchase all sorts of stocks and bonds at exceptionally low prices that will pay off handsomely in the future.

Of course, some funds are much better positioned to capitalize on the variety of opportunities than others are. Funds that are run by first-rate stock- and bond-pickers with broad investment universes have an edge over offerings that are run by highly accomplished managers with narrow purviews as well as over funds that are run by less-skilled skippers. But even the most talented and widest-ranging managers can't take advantage of the tremendous bargains out there if they don't have the cash to do so, and cash is in short supply these days. Indeed, as we pointed out in an October column, most funds have quite limited cash on hand and much of that is going to meet shareholder redemptions because of huge outflows and paltry inflows in recent months.

Fortunately, there are a number of funds with the managers, the strategies, and--at least as of quite recently--the cash to make the most of this year's turmoil. We highlighted three domestic-equity offerings with these traits in a September column, and we identify four more here. We'll recognize some international-stock and fixed-income funds with these attributes in future articles.

Berwyn Income BERIX
This conservative-allocation fund was sitting on a 13.5% cash position at the end of the third quarter, and it hasn't been hit by redemptions like most offerings have been in 2008. That means that Ed Killen and George Cipolloni should have plenty of cash to deploy while looking for the kinds of cheap dividend-paying stocks, REITs, preferred stocks, convertibles, corporate credits, and government bonds they always prefer. Killen and Cipolloni have executed their far-reaching strategy deftly in this year's meltdown and in all sorts of conditions in the past. That record of success bodes well for the future, while this fund's reserved volatility profile--and ample yield-- temper the risk here.PAGEBREAK

Greenspring GRSPX
This fund employs one of the more distinctive styles in its category. Most moderate-allocation skippers invest in a straightforward collection of large-cap equities and high-quality bonds, but Chip Carlson is a bargain-hunter who focuses on mid-cap and small-cap stocks, who favors higher-yielding convertible and corporate bonds, and who frequently--and currently--holds a significant amount of cash. Carlson has led this fund to superior results in this year's extreme sell-off and over time with his atypical approach. Those accomplishments, plus his careful research and high standards, make us think that Carlson can find some long-term winners in the current turmoil.

Osterweis OSTFX
This mid-cap blend fund had an 18% cash stake as of Sept. 30--and it did not have significant net outflows during the first nine months of the year--so John Osterweis and his comanagers are much better positioned to purchase compelling opportunities than most domestic-equity skippers are. Meanwhile, they make full use of the market-cap spectrum and regularly consider overseas opportunities as they look for out-of-favor stocks with good cash flows and growth potential. And they have earned topnotch results this year and over the long term with their exceptionally wide-ranging approach. All this--plus the facts that the managers are very selective, pretty patient and quite comfortable holding cash--makes us think they can capitalize on the current carnage without taking on too much risk.

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