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Taking Stock of Mutual Funds Post-Downgrade

American bears are thriving while small-cap funds get bludgeoned.

Russel Kinnel, 08/15/2011

It's been quite a roller-coaster ride in the past couple of weeks, so let's see if we can get our bearings. I'll take a look at some of the biggest changes in total returns and relative performance since the end of July. I'll also take a glance at some big themes.

It only takes a couple of days for things to change dramatically, and that's what we've seen. Assets that are perceived as having greater risk have been punished and those with less risk have been spared the worst of the market's wrath. Specifically, credit risk has been punished in the bond market as high-yield and investment-grade-corporate have been dinged while Treasuries have been bid up by investors who don't see the irony in lending more money to the United States Treasury over concerns about America's deficit. Precious metals have done well as a safe haven. Meantime, small caps have been hit harder than large caps. Overseas, Japan lost the least while Europe and Latin America were hit hardest.

Let's start with relative performance rankings and see which funds have seen their rankings change the most relative to their peers.

 Franklin Income FKINX has gone from top 5% to bottom 10% of its category as returns have gone from plus 5% to minus 2.5%. It's an instructive warning to anyone who owns an income fund that these funds can tackle the income challenge in a lot of ways. Franklin Income has a nominally conservative asset mix with much more in bonds than in stocks. However, it leans heavily toward yield on both fronts and thus is one of the more aggressive income funds around. Specifically, it owns a lot of high-yield bonds and that led to poor results in 2008 and again these past couple of weeks.

 Fidelity Overseas FOSFX slipped from a 4% gain to an 8.4% loss and its relative performance fell from 20 to 59. A big bet on Europe and economically sensitive stocks in particular has taken a bite. It's a shame because the fund had suffered three poor calendar years prior to this one and had seemed set to break that streak.

 Vanguard Asset Allocation VAAPX slipped from a 3.2% gain to a 5.7% loss, dropping its relative performance to 95 from 54. The reason is simple: The fund was aggressively positioned, with a heavy equity weighting and nothing in bonds. The fund allocates between the S&P 500, cash, and the Barclays Aggregate based on management's view of the prospects for each asset class. It can go from 0 to 100 in each class; most recently 73% of its assets were in stocks.

The Winners
John Hussman is a permabear, so the last couple of weeks were just the thing for his funds.  Hussman Strategic Total Return HSTRX actually made money, as returns rose to 3.8% from 2.3% and relative performance surged to 1 from 91. A wary Hussman had the fund almost entirely in cash and Treasuries.

 Akre Focus AKREX manager Chuck Akre was likewise wary about the U.S. economy but he expressed that wariness by buying some defensive names, including like  Dollar Tree DLTR and  TJX TJX. A 15% cash stake didn't hurt, either. Thus, returns only slipped from 1.9% to negative 2.2% and the relative ranking soared to 13 from 79.

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