Two stock funds that trailed most of their peers in 2008 have beaten most of them in the recent sell-off.
Policymakers around the world are squabbling ineffectually over how to head off impending financial and economic calamity; volatile markets are rattling investors' portfolios and bones. No wonder many are asking if the fall of 2011 is a rerun of the awful autumn of 2008. So far this year, however, a couple of fairly well-known stock mutual funds and their managers have been able to answer no, at least in relative terms.
No one would like to relive 2008, but these funds, their skippers, and the investors who remain with them probably are especially eager to avoid a repeat. They each did more terribly than 90% or more of their peers in one of the worst years ever for stocks. So far in this anxious campaign, however, they've turned the tables and ranked ahead of 90% of their category rivals at the start of the fourth quarter. Here's a quick look at the funds and how they've done it.
If someone told you in January that another debt crisis (this time emanating from European sovereign debt) would brutalize financial stocks again this year, you might have picked Clipper CFIMX as a candidate to post bottom-feeder results. It is concentrated, keeps more than 44% of its assets in financial stocks, and got pummeled in the last financial crisis. Yet here it is down 7.8% through Oct. 4, ahead of more than 94% of its large-blend peers and 1.5 percentage points ahead of the S&P 500 Index.
During and after their 2008 thumping, which still weighs on the fund's longer-term record, managers Chris Davis and Ken Feinberg made a concerted effort, in the words of Davis, to de-risk the portfolio by buying world-class, high-quality companies that were trading at historically low valuations in late 2008 and 2009. Yes, the fund still has a lot in financials, but it owns only one traditional, credit-sensitive bank, Wells Fargo WFC. The rest is spread across insurers, money managers, an asset custodian, and oddball conglomerates. That has taken the sting out of this year's market routs and so has the performance of brand-name firms with sustainable competitive advantages such as Costco COST, Bed Bath & Beyond BBBY, and Roche RHHBY.
Positions in smaller and more obscure companies have buoyed the fund as well. Document-storage firm Iron Mountain IRM has been the fund's best performer this year since Davis and Feinberg joined other investors in pressuring its board to restructure. Closely held, but widely respected, asset manager Oaktree Capital Group is illiquid but has laid plans to go public.
Davis and Feinberg's record since taking over this fund in 2006 still stinks, but performance has improved since the market's March 2009 bottom. The fund's recent resilience keeps the comeback alive.
No Pain, No Gain
The most telling thing about Longleaf Partners Small-Cap LLSCX better relative performance in this sell-off is that one of the stocks that hurt it the most in 2008 when the fund lost 44% is helping it this year. The fund--which follows an iconoclastic, concentrated, long-term focused, deep-value approach--bought department store company Dillards DDS in 2007 when it was falling in the early stages of the last bear market. The stock continued to plunge in 2008 but staged triple-digit rallies in 2009 and 2010. Through Oct. 4, it was up another 13.6%. The managers held through the stock's nadir and still gave it about 6% of assets at midyear even after trimming the position as it swelled.
Dillards is a poster child for this fund's approach, which requires almost masochistic patience with some stocks. It's willing to hang on through all sorts of pain if it thinks a company's share price significantly underrates its intrinsic value because ultimately, if the managers are right, price will catch up to value. That patience allows the fund's big losers to turn around and become big winners in later environments. Indeed, other long-term holdings here, such as telecommunication-services wholesaler Level 3 Communications LVLT and funeral-homeowner Service Corporation International SCI, suffered harrowing losses in 2008 but have helped limit this closed fund's losses to 7.4% this year, which beats most of its peers'.
Key sales have aided the fund as well. The fund sold longtime holding Pioneer Natural Resources PXD in the second quarter, before a drop in oil prices dropped the stock by nearly 28% in the past three months.
This is not a strategy for the weak willed, but it has been a rewarding one over time. Its 9.8% annualized gain from its February 1989 inception through Oct. 4, 2011, beats the Russell 2000 Value and the average small- or mid-cap value fund.
Market conditions can change quickly and have mercurial effects on your investments. A fund's performance in one bear or bull market doesn't mean it will perform the same way the next time its investment universe tanks or takes off. Indeed, a manager's strategy may not even deliver the same results at different funds in the same market. Davis' other more-diversified funds-- Davis New York Venture NYVTX and Selected American SLADX--are lagging their peers and benchmarks badly this year, in part because they have more European and other overseas investments. Similarly, Longleaf's larger-cap and foreign funds also are suffering more than their peers and benchmarks this year.
To get the most out of your funds, understand them well enough to know if you're willing to hold them through fat and lean times.