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Like Bill Miller, These Top Managers Having Lousy Years

A terrible 2006 rank doesn't mean a manager has lost his touch.

Gregg Wolper, 11/28/2006

Bill Miller of Legg Mason Value LMVTX is not the only well-respected domestic-stock manager whose fund currently sits in (or near) the 99th percentile of its category for the year to date.

Investors know they should not attach much significance to one-year results, but when a fund they own (or have considered owning) has sunk to the bottom of the year's performance chart, it's understandable that they'd want to know what's up. In short, what accounts for the lousy showing, and more importantly, is the fund still worth owning?

We certainly don't  believe that Miller has lost his touch, this year's results notwithstanding. Here, we'll take a look at three other domestic-stock funds with highly respected managers who currently find themselves in the same situation. The good news for shareholders of these funds, as with owners of Legg Mason Value, is that there is no reason to panic about any of them.

Those of you who own this fund probably know that manager Bob Rodriguez's unusual style can easily lead to periods when the fund will lag its counterparts by substantial margins. So the fact that the fund sits in the 97th percentile of the small-value category for the year to date through Nov. 21 may not come as a shock. In fact, the fund landed in just about the same place in 2004. But it rebounded to the top percentile in 2005--repeating the pattern it followed in 2000 and 2001.

As Rodriguez explains in his just-released shareholder report, this year the culprits have been a high cash stake, which held back performance as the stock market rallied, and poor showings from several energy-related holdings (a large percentage of the portfolio), such as Rowan Companies RDC and top-five holding Patterson-UTI Energy PTEN, which is down 20%. But Rodriguez remains firmly attached to his strategy, arguing that holding cash is the only sensible option when he can't find enough companies that meet his strict criteria. And he has added to his stakes in both Rowan and Patterson-UTI, as well as other underperformers. He remains convinced of the case for energy, believing high energy prices are here to stay.

We're confident that this closed fund will continue to reward investors over the long run. True, as this year's showing confirms once again, it's almost guaranteed to trail well behind its rivals from time to time. But long-term investors should focus on the long term--not yearly rankings.

Muhlenkamp Fund MUHLX
It doesn't get any worse than this: For the year to date through Nov. 21, Muhlenkamp Fund is in the large-value category's 100th percentile. (We recently moved the fund to that grouping from the mid-value category, owing to the trend of its portfolio.)

In general, the problem has been that manager Ron Muhlenkamp, who incorporates a significant amount of big-picture thinking into his analysis, has been optimistic about economic growth, and that's reflected in the makeup of the portfolio. Many stocks that relied on that trend performed quite well in recent years, helping propel the fund to great returns from 2003 through 2005, but they took it on the chin in 2006. In fact, the portfolio's top 25 sports seven different double-digit losers. Like Rodriguez, Muhlenkamp has been bullish on energy, which has hurt this fund in 2006 as it has FPA Capital. Housing-related stocks have been another drag.

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