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Fund Times: The Latest from 2007 Winners and Losers

Plus, Heartland settles, Gross' skepticism, new funds, and more.

Morningstar Analysts, 02/04/2008

The harsh January sell-off has meant that in many cases last year's winners have suffered a pratfall and some of the losers have lost significantly less.

Bill Nygren and Henry Berghoef's Oakmark Select OAKLX has gone from the bottom 2% of large-blend funds in 2007 to the top percentile in January with a 3.8% loss for the year to date. Washington Mutual's WM 38% rebound and JP Morgan's JPM 8% gain are a big reason why. Three other funds that got roasted by subprime are also rebounding in relative performance though they're still in the red. Schneider Value SCMLX, Schneider Small Cap Value SCMVX, and Weitz Value WVALX still have big holes to dig themselves out of as their dismal 12-month returns attest. One fund that hasn't shown any sign of a recovery: Muhlenkamp Fund MUHLX, due to a bigger homebuilder stake than the other funds mentioned. We recently wrote that manager Ron Muhlenkamp has scaled back homebuilder and financials bets that hurt this fund badly last year, but these moves have yet to positively impact the fund's relative returns.

Meanwhile, two momentum funds that were golden last year have given back a big chunk of their gains this year. American Century Vista TWCVX is Exhibit A. Veteran managers Glenn Fogle and company rode their momentum-driven algorithms to a 38.7% return last year. Thus far this year, the fund is down nearly 16% and trails most rivals even in its hard-falling mid-growth group. Turner Midcap Growth TMGFX has suffered a similar fate. Its comanager team successfully focused on firms' accelerating earnings growth last year to deliver a 24.4% gain. This year, however, the fund's -13.5% return trails 86% of rivals.

Gross Not So Sanguine on Moves to Spur Economy
PIMCO CIO Bill Gross is lukewarm at best on recent moves to stimulate the economy via lower interest rates and government tax rebates. In Gross' February 2008 Investment Outlook, he argues that increased government spending, not just the aforementioned short-term measures, are what it will take to fill a consumption gap created by faltering consumer demand. Gross doesn't expect a big government spending initiative--he even references the 1930's new deal--any earlier than 2009. Thus the U.S. and global economies may "sleep walk" in the coming months.

Heartland Settles Bond Funds' Suit
Heartland Advisors has put an end to its muni-bond fund scandal--finally. More than eight years after mishandling the repricing of illiquid bonds that caused the firm's shareholders to lose $60 million, the firm and its current and former employees agreed to SEC fines totaling nearly $4 million. The settlement states that Heartland did not have an adequate review and pricing process and negligent conduct led to the bonds being improperly valued. The final repricing caused two funds to post one-day losses totaling nearly 70% and 45% respectively. The SEC then forced the funds' liquidation.

Rainier Teams with John Hancock
Rainier Large Cap Equity Growth RGROX will reorganize into the John Hancock Rainier Growth Fund, pending shareholder approval. The fund employs a growth-at-a-reasonable price strategy similar to the firm's three other successful domestic-stock growth funds. Rainier seeks to expand this fund's distribution by retaining John Hancock Investment Management its advisor. (John Hancock would replace Rainier in this role.) Rainier and its six-member management team will stay aboard as subadvisor and run the fund the way they always have.

There are risks and benefits to this deal for current shareholders. John Hancock will keep management fees at 0.75% for two years. If John Hancock succeeds in distributing the fund widely, shareholders may benefit as the fund realizes economies of scale and expenses fall. If John Hancock doesn't grow assets though, expenses could rise.

Leuthold to Launch Global Fund
Leuthold has filed with the SEC for a new fund that would boast great flexibility. Leuthold Global is the firm's latest idea. Like siblings Leuthold Core Investment LCORX and Leuthold Asset Allocation LAALX (both of which are moderate-allocation offerings), this fund will keep at least 30% of its assets in bonds. The fund will also employ a global multicap equity strategy. The Leuthold group will use quantitative strategies similar to those that have produced strong long-term results at Core Investment. Initial expenses are high at 2.07%.

PowerShares' Passage to India
An India ETF is in the works from PowerShares, and the firm claims this one will be a bit different from what's available now. PowerShares India hopes to launch with ticker symbol PIN by late February. The ETF invests directly in underlying Indian stocks, as opposed to gaining exposure to them via derivatives and other instruments. It will track the Indus India Index, compiled by the firm Indus Advisors. The initial press release does not mention a proposed expense ratio, but many of PowerShares' single-country funds charge 0.75%.

India has been one of the hottest emerging markets in recent years, but it would be dangerous to chase its performance. ETFs and even actively managed funds backed by experienced teams can quickly disappoint in frothy or trendy markets. Recent returns at Matthews India MINDX, a well-managed fund, could be a bad omen for this ETF: That fund has lost nearly 15% in 2008 after two years of very hefty gains.

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