Stock returns since October 2007 have been flat, but these funds have been anything but.
Investors can be forgiven for not celebrating this week's five-year anniversary of the U.S. stock market's Oct. 9, 2007, apex. Yes, domestic stocks and the funds that own them have rebounded from the financial crisis' nadir in recent years. The S&P 500 Index and the Dow Jones Industrial Average are both within hailing distance of their 2009 highs. Alas, even with with dividends reinvested, the benchmarks' respective results have been meager--about 0.6% and 1.7%, annualized, for the five years ending Oct. 9, 2012. The same goes for the typical domestic stock fund; all it has to show for the past five years' excitement is a 0.4% "gain".
Investing, however, as advisor and author John Train has noted, is the art of the specific. A look at some at some of the most notable and not-so-notable performances of the last five years among funds rated by Morningstar analysts adds some contour to the broad market's rather flat results. Here's a look at some of the domestic stock leaders and laggards since the market peak:
From Stubborn to Star
The deeply held contrarian convictions of veteran manager Don Yacktman and his comanagers at Gold-rated Yacktman YACKX and Silver-rated Yacktman Focus YAFFX can make these concentrated funds look stubborn for long periods. In the past five years, though, the managers' value discipline and willingness to hold cash when bargains look scarce have rewarded patient investors. The more than 9% annualized gain of Yacktman and nearly 10% advance of the more concentrated Yacktman Focus were among the best annualized five-year domestic-stock fund returns on Oct. 9, 2012.
These funds won't always top the charts. Indeed, they've lagged their large-blend peers and the S&P 500 so far this year as some large brand-name stocks in the portfolios, such as PepsiCo PEP and Procter & Gamble PG, have trailed their industry peers and the S&P 500. While asset growth could limit some of the flexibility the $8.6 billion Yacktman and $7.3 billion Yacktman Focus enjoyed when they were smaller, the managers also have not sworn off more cyclical and controversial fare, such as the beleaguered Hewlett-Packard HPQ and Research in Motion RIMM. The funds' managers are willing to be patient with such picks. The funds' investors need forbearance, too.
Out, Out, Bright Spot
Marsico Flexible Capital's MFCFX returns have been a rare recent bright spot for that fund family. As Marsico Capital Management struggled with poor performance, outflows, and its own debt-laden balance sheet, Flexible Capital's Doug Rao used the fund's wide-ranging strategy to good effect. For example, he moved aggressively into emerging-markets, financial, and more cyclical stocks early in 2009, which set the fund up for strong subsequent results. Unfortunately, that performance has to be heavily discounted. In July 2012 Rao left the firm and the fund. It's now comanaged by Munish Malhotra, who has a short mixed record at other Marsico funds he's helped run, and Jordan Laycob, who hasn't led a fund before. Furthermore, there has been a lot of turnover among the firm's analysts and the fund's fees are high. The Negative-rated fund has done well since Rao's departure, despite the changes, but it's hard to say with certainty whether that performance is sustainable.
Fidelity Small Cap Discovery's FSCRX small-blend relative outperformance may be sustainable, as long as manager Chuck Myers sticks around. Manager tenure is always uncertain at Fidelity Investments, where the leaders of some funds change like hockey lines. Myers has more than a $1 million of his own money on the line here and is a bit of an outlier at Fidelity because of his value-orientation and small-cap focus. Fidelity also has invested in building its small-cap team in the past decade, so Myers could remain here for a while. Myers, who was mentored by the inimitable Joel Tillinghast of Fidelity Low Priced Stock FLPSX, hasn't done anything fancy; he's just been a good stock-picker thus far. The fund's 8.8% annualized return from the market's 2007 top through Oct. 9, 2012, beats 99% of the category. Timely purchases of housing stocks like Meritage Homes MTH and KB Home KBH have helped recently. He's also made some deft selections in the financial sector for this Silver-rated fund during his tenure.
Hero to Goat
Sometimes, it's a good thing to be able to discount the record. In the last decade, Legg Mason Capital Management Value LMVTX has gone from the fund everyone envied to a poster child for reversion to the mean. The last five years ending Oct. 9, 2012, during which the Neutral-rated fund lost nearly 8.5% annualized, have been an extension of the slump that began in 2005 as its former manager, Bill Miller, celebrated his unprecedented fifteenth calendar-year victory over the S&P 500. Poor financial picks savaged the fund in 2008, and longer-term tech holdings like Cisco Systems CSCO and Texas Instruments TXN have yet to pay off. Current manager Sam Peters, who joined Legg Mason as Miller's protege from Fidelity in 2005 and took over here last year, has reduced some of this fund's concentrated bets and added health-care and consumer staple stocks, but it remains to be seen whether reversion to the mean will soon work in the other direction for this fund.
It's Famine's Turn
Trailing returns rarely tell the whole story about a fund, but CGM Focus' CGMFX five- and 15-year rankings reveal at least one salient fact. Through Oct. 9, 2012, its 10.6% 15-year gain was better than 99% of the large-growth category, while its 10.3% loss for the five-year period was the peer group's worst. Ken Heebner, this highly concentrated, high-turnover fund's long-time manager, has always been willing to engage in a lot of short-term trading and endure excruciating short-term losses in pursuit of long-term gains. That makes the Neutral-rated fund difficult to use for all but the most iron-gutted investors. Heebner holds about 20 stocks, concentrates in certain sectors and stocks, and changes those concentrations frequently as he trades manically (turnover has averaged 442% in the past five years). It's a Jekyll-and-Hyde fund that has been more Hyde than Jekyll in recent years as an early wager on a financial rebound in 2008 hurt and positions in auto-parts companies stung in 2010. Heebner still has a terrific long-term record, but the tables can and do turn quickly at this feast-or-famine fund. He's also pretty much a one-man show and in his 70s. He has no retirement plans, but it's unclear who would step in if he did.
Victim of Circumstance
Some funds are victims of their own investment universes. Winslow Green Growth WGGFX, which got new managers last year when founder Jack Robinson handed the fund over to a trio of understudies, focuses on companies at the cutting edge of solving environmental problems. Such firms tend to be small, aggressive growth stocks that have more than a whiff of biotech or emerging technology about them. Though there are some larger stocks with competitive advantages, such as engine-maker Cummins CMI, sprinkled in the portfolio, its substantial helping of smaller, more-speculative holdings have taken it on a wild ride. The fund has done well in rising markets such as 2003-07, 2009, and so far this year; but when the going gets tough, like it did in 2008 and 2011, this fund goes into the rough. That uninviting risk profile, as well as a narrow focus, high fees, and recent management change, contribute to the fund's Negative rating.