Can these funds go from the outhouse to the penthouse?
Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.
Unless you've been hiding under a rock, you're all too aware that it's been a lousy 12 months for stocks. The credit and liquidity crunches kicked off by the implosion of lower-quality mortgages and a slowing economy have caused a lot of pain for investors: For the year ended Sept. 9, 2008, the MSCI U.S. Broad Market Index declined 13%, and some of our favorite funds have done substantially worse.
Those are the kinds of results that make investors want to toss out their statements unopened and avoid looking at funds at all. But just as some of the savviest value managers we've talked to say they benefit greatly from the buying opportunities presented by a bear market, fund investors can do the same by scooping up some real gems when they're down and out.
True, the situations aren't completely analogous with stocks and funds that are down. Funds that have seen big losses sometimes ditch stocks that haven't worked out, only to see them rebound sharply as fundholders miss out on those gains. But big rebounds do happen in the fund world, particularly when the managers and approaches haven't changed. Managers' strategies and favorite sectors go in and out of favor; the best time to buy is when they've hit bottom. Certainly, it's been a winning formula in the past--just look at all the value funds that were left for dead in the late 1990s, only to rise with a vengeance once valuations started to matter again. They included such long-term standouts as American Funds Washington Mutual
We've come up with a list of five funds that have posted very poor relative performance, yet still have bright futures ahead. We sorted through all of our Fund Analyst Picks and singled out open, diversified funds with the worst relative performance over the past 12 months. We vet our picks regularly to make sure we include only those funds in which we have a great deal of confidence going forward--those with sensible strategies, proven management teams, moderate costs, and a history of treating shareholders well.
This fund's shareholders have had a rough go of it in recent years. The fund's veteran management team left at the end of 2005 after a stretch of poor performance (though its long-term record was superb). True, the team was replaced by the accomplished duo of Chris Davis and Ken Feinberg (who manage large-blend Picks Davis NY Venture
This large-blend fund has lagged 95% of its category rivals over the 12 months ended Sept. 9, 2008, losing 21% over that span. Blame can generally be pinned on the fund's exposure to companies reliant upon consumer spending, such as media firms and retailers, as well as General Motors
Lead manager Bill Nygren's struggles have been well-documented, particularly his most glaring misstep--betting big (to the tune of 15% of assets at times) on mortgage lender Washington Mutual