• / Free eNewsletters & Magazine
  • / My Account
Home>Research & Insights>Investment Insights>Three Funds With a Bad Case of the Deja Blues

Related Content

  1. Videos
  2. Articles
  1. Grantham Keynote: Investing in a Slower-Growth World

    The GMO chief strategist highlights the factors behind the market's bullish bias, abnormally high corporate earnings, current valuation levels, a slowdown in productivity, and the great paradigm shift in natural resources.

  2. Session 2: Midyear Portfolio Checkup and Risk Factor Review

    Director of personal finance Christine Benz will help you check your true exposures and stress-test your holdings in session 2 of Morningstar's 2012 Midyear Financial Checkup.

  3. Want Dividends? Look Outside the U.S.

    Royce Funds' David Nadel discusses how non-U.S. cultures influence dividend payers, why Europe thrives on exports to emerging markets, and a growth story in Africa.

  4. Where Active Has Beaten Passive This Year

    After a rough 2011 for active managers, the average active fund has beaten its benchmark in only two categories in 2012. Is the trend here to stay?

Three Funds With a Bad Case of the Deja Blues

This year has not been 2008 all over again for these offerings, to the detriment of their relative returns.

Dan Culloton, 11/04/2011

What a difference a crisis makes. A month ago I highlighted a couple of funds that have had a much better time of it during 2011's sovereign debt debacle than they did in 2008's subprime-mortgage implosion. If nothing else the cases of Clipper CFIMX and Longleaf Partners Small-Cap LLSCX showed that one lousy bear market does not a perennial laggard make. Conversely, putting up strong results in one tough market doesn't guarantee a fund will tough it out again in the next. Indeed, a number of notable funds that fared better than 90% of their peers in 2008 are trailing 90% of them so far in 2011. Here's a look at three offerings with the biggest absolute losses so far this year.

Theory of Relativity
You can't eat relative returns, but they can eat you. Fairholme FAIRX has lost less so far in 2011 than it did in 2008, yet investors who flocked to the fund three years ago are fleeing now. Of course, back then the stock market and most other large-cap stock funds lost much more than Fairholme; in 2011 through Oct. 31, the fund trailed the S&P 500 Index by an apocalyptic 25 percentage points. It lagged the large-value norm by nearly 22 points.

Many pixels and much traditional ink has been spilled analyzing the fund's woes, including its huge stake in troubled banks, outflows, management turmoil and other distractions, such as Berkowitz's responsibilities as chairman of St. Joe JOE. Yet, while much around manager Bruce Berkowitz has changed recently, he remains the same. The fund's long 2000s winning streak inured many investors to the fact that in order to win big like Berkowitz did for several years in a row, you have to bet big. Such wagers can and do go bad. Berkowitz is still an aggressive contrarian with a strong long-term track record who can make up lost ground in a hurry, as the fund's 13.5% S&P- and peer-beating gain in October demonstrated. But if it wasn't clear before that this fund needs a long leash and investors with tight grips, it should be now.

Spoiled Rotten
Parnassus Small-Cap PARSX may have spoiled its shareholders, too. The fund not only finished four of the past five full calendar years in the top fifth of the small-blend category, but it also was one of the few equity funds to outperform most peers and its benchmark in both 2008's implosion and in the subsequent rebound in 2009 and 2010. That made the fund's above-average standard deviation easier to live with.

The socially screened fund always packed a punch, though. Manager Jerome Dodson looks for stocks that trade at a discount to his estimate of their intrinsic values and meet the fund's social screens, too. That limits the fund’s opportunity set and leads to a compact, benchmark-agnostic portfolio that currently has more than 40% of its assets stashed in technology stocks and a fifth in micro-caps. The fund’s independent streak has differentiated it from rivals, but this year it hit a pothole on the road less traveled, with telecom-equipment companies such as Finisar FNSR and Tellabs TLAB, as well as regional banks First Horizon FHN and First American FAF, plummeting. Dodson hasn't abandoned his high-conviction style, though, and should be able to get back on track.

Famine Year
After more than three decades of rapid-fire, feast-or-famine investing, it should be no surprise to find CGM Mutual LOMMX at the bottom of the category rankings just a few short years after reigning as king of the hill. Its nearly 11% loss through the end of October 2011 pales in comparison to its more than 28% 2008 loss, but it trails 98% of the large-growth category and has ceded 12 percentage points to the S&P 500, even though it keeps more than one fourth of its assets in bonds.

Because the fund is fiercely unique, gauging it relative to any category or benchmark will always be an apples-to-oranges comparison. Veteran manager Ken Heebner owns a handful of stocks and bonds, piles into certain sectors, and turns the complete portfolio over four to five times per year. It's hard to know what's going on here at any given time, but it appears that coal and precious-metals miners, such as Walter Energy WLT and Freeport-McMoRan Copper & Gold FCX, have gouged returns so far this year. This fund is capable of posting explosive returns and likely will occupy its category's top spot again. Still, it's too mercurial for all but the most stout-hearted of investors.

The common denominator among these funds is that a string of strong years can mask underlying risks. Looking beyond recent performance in an effort to understand the potential pitfalls of a manager's strategy and portfolio when they are riding high can help investors keep their heads when the market lays them low.

1
Dan Culloton is an associate director of fund analysis for Morningstar and editor of Morningstar's Vanguard Fund Family Report, a monthly newsletter that offers independent, no-holds-barred guidance on the pros and cons of this dominant fund family. Click here for a free issue of the Vanguard Fund Family Report.
blog comments powered by Disqus
Upcoming Events
Conferences
Webinars

©2014 Morningstar Advisor. All right reserved.