In a make-or-break year, some of these funds are breaking.
It isn't pretty to see a fund in a nasty slump. Investors' anxiety levels go up and managers feel pressure to produce a turnaround. Since we're past the halfway point for 2012, I thought I'd check in on five once-strong funds that were struggling at the end of 2011. I looked for funds with very poor three-year returns at that point and then pulled their year-to-date returns through July 18. Let's take a look at these funds and what their performance this year tells us.
The hardest hit of our five funds, it had a three-year annualized loss of 1.6% at the end of 2011, the worst of any large-growth fund in our database. Unfortunately, it has stayed in the cellar this year after a brief early rally. It has gained 0.6%, which places it in the bottom 2% of the category. With a turnover rate north of 400%, it's not easy to say exactly what has gone wrong, but it appears one problem has been a bet on a stronger economic recovery than has materialized. Manager Ken Heebner's superfast moves and focused portfolio make the fund a tough one to own. His unpredictable and uninformative shareholder letters mean that it is hard for people to understand how he's positioning the fund. A second issue is that Heebner has very little support and is past retirement age. The positive is that, despite awful recent results, Heebner does have a pretty good long-term record. Still, you have to take a huge leap of faith to buy this fund.
Bruce Berkowitz has gone from outhouse to penthouse. Fairholme's 5.6% annualized return was one of the worst in the large-value category at year-end, but a buoyant 22.7% rebound for the year to date has given the fund the best returns of any U.S.-equity fund outside of those using leverage. The fund's trailing five- and 10-year returns both rank in the category's top quintile. Unlike CGM, it's pretty clear what has happened. Battered names like American International Group AIG, Sears SHLD, and Bank of America BAC have rebounded brilliantly and are clearly the cause and solution to Fairholme's problems. It's encouraging to see that Berkowitz wasn't as far off in his analysis as the market was saying he was a year ago.
That said, the portfolio is still quite aggressive in that it owns some highly concentrated deep-value plays. Smooth sailing now doesn't mean forever. It is still a good fund but only if you plan to hold for 10 years or more.
Brandywine's claim to fame once was that it was a momentum fund with better defense than its competition. However, it has since performed poorly in all environments. The fund's 3.4% annualized return put it in the bottom 2% of its mid-growth category at year-end, and it has continued to struggle this year. Its 5.25% year-to-date return lands just over the line in the bottom quartile. Brandywine attempts to use human intelligence to sniff out trends faster than the rest of the world. That's a hard game to play as many other people are trying the same thing, and the fund continues to struggle to gain an information edge. As I wrote a couple of years ago, Brandywine follows a strategy that's difficult to execute well, and it's hard to make the case that the fund will improve as information moves faster and faster. Yes, I'm sure it will have its moments, but probably not enough.
International Equity BJBIX
Artio's 0.8% annualized return over the three years ended 2011 landed it in the bottom 3% of its peer group. This year it still hasn't found its groove, posting a meager 2.4% return. Like many individual investors, management has bet on emerging markets even as the developed world has outperformed. Specifically, the fund has triple the foreign large-blend category's emerging-markets weighting. The fund has 9% in China, 4% in Russia, and 4% in Hong Kong, which is a developed market but obviously one that is closely tied to China.
Historically, Rudolph-Riad Younes and Richard Pell have made excellent country calls, but that hasn't been the case of late. The positive case is that there doesn't appear to be a reason they can't return to their winning ways, and an emerging-markets rally could quickly perk up performance at this fund.
Arnie Schneider aims to pluck deep-value stocks that are in trouble but will escape bankruptcy and rebound to regain their former health. That's a very difficult thing to do well, and Schneider's bets have not worked well. This year, coal stocks plus Navistar NAV and Dell DELL have undermined gains in the financials sector. The fund's 2.3% year-to-date return places it in the bottom 2% of its category following a three-year record of 10.5% annualized that was in the bottom 4% of the mid-value category at year-end.
As with Brandywine, I'd imagine this fund will have its moments, but it seems to need a really robust economy to thrive as the issue selection hasn't been strong enough to boost the fund on its own.