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The Biggest Mutual Fund Surprises of 2012

Some funds had dramatic comebacks, while others remained cellar-dwellers, writes Morningstar's Russ Kinnel.

Russel Kinnel, 12/31/2012

We all saw this coming today, right?  A huge rally in Europe, robust gains in U.S. stocks, and strong returns in bonds? Ha.

Some individual fund performances were surprising, too. Let’s take a look at some of the good and bad surprises of the year. I’ll skip over the funds where managers are nominated for manager of the year as we already covered that ground. All the 2012 returns you see quoted are through Dec. 28.

From Worst to First
Buying or selling based on the results of one year is a bad idea. Fairholme FAIRX and Schneider Small Cap Value SCMVX are great illustrations of that. They had great returns in 2010, appalling losses in 2011, and awesome gains again in 2012. Focused funds tend to have big swings because a few stocks can play such a big role in returns. When they are focused deep-value funds like these two, those swings are magnified.

Financials are a key part of the story for both as the sector rallied smartly. Fairholme has a 33.6% gain for the year to date and Schneider has a 34.4% gain. This is not to suggest these two are identical twins. Fairholme held up wonderfully in 2008 thanks to Bruce Berkowitz’ wariness of banks and fondness of cash, while Schneider had a big bet on some of the shakiest mortgage companies--and you can guess how that went.

From Worst to Worst
I’m so old I can remember when momentum funds were really hot and cutting-edge. Man, does that seem like a long time ago. For starters, momentum funds really struggled in the bear markets of 2000-02 and 2008. They got hurt in the first sell-off because that one was about multiple compression. They tanked in 2008, because the mortgage crisis moved faster than individual company numbers and their momentum models were too slow to keep up. 

To make matters worse, momentum funds got caught flat-footed in the debt crisis in 2011 and--unlike Fairholme and Schneider Value--they tripped up again in 2012.  For example, Turner Midcap Growth TMGFX lost 8.4% in 2011 but gained only 3.8% in 2012. Brandywine Blue BLUEX lost 10.3% in 2011 and gained a mere 5.1% in 2012, giving it three bottom-decile performances in the past four years. There were a few exceptions, though, such as AQR Momentum AMOMX, which produced a nice 15.2% gain this year.

A Good Year for Unpopular Funds
Fairholme wasn’t the only unpopular fund that had a strong year. The three most heavily redeemed funds in 2011 all produced top-quartile returns. American Funds Growth Fund of America AGTHX was hit with $33 billion in outflows, but it returned 18.6% in 2012.  Amazon.com AMZN, Apple AAPL, and Gilead Sciences GILD led the fund to a strong year.

American Funds Capital World G/I A CWGIX shed $9 billion to outflows in 2011 but it gained 17.9% this year, as names like Bayer AG BAYRY and Home Depot HD helped it to a good year.

Russel Kinnel is Morningstar's director of mutual fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for greater gains. (Click here for a free issue). Mr. Kinnel would like to hear from readers, but no financial-planning questions, please. Follow Russel on Twitter: @russkinnel.

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