Will spring follow a harsh winter for these four?
Some deep-value managers look for stocks hitting new 52-week lows. Others will look for companies where margins are near the bottom of their typical range. You can take a similar approach with mutual funds. As I noted last week, some of the best performers in 2012 were funds that had a rough 2011.
I know the weak performance in 2012 will scare some away, but for those who own the funds, I hope to make the case for why you should stick around. For the two funds that are closed, you might want to add them to your watchlist, as underperforming closed funds often reopen.
Just as with deep-value investing, though, you have to be choosy. You need funds with strong fundamentals that give you a good reason for thinking there might be a rebound. For example, I won't be betting on a rebound at CGM Focus CGMFX, Nuveen Tradewinds Global All-Cap NWGAX, or Brandywine BRWIX even though that's certainly a possibility. Nuveen Tradewinds suffered a manager exodus. Brandywine and CGM Focus have been high-risk/low-reward too often among other issues.
Royce Value RYVFX
Whitney George and Jay Kaplan have have big overweightings in energy and basic materials--two of 2012's worst-performing sectors. Moreover, they have underweightings in health care, which was one of the best places to be. As a result, the fund had a dismal 2012 showing. They aren’t attempting to make sector calls exactly, but George does have a bullish view on materials and energy because of demand from China and other emerging markets. So, they have been a consistent feature of the fund since its beginning. However, the fund has been a winner over the long haul. It is in the top 5% of its peer group with a robust 13.2% annualized return during the past 10 years.
FPA Capital FPPTX
Yes, a bottom-decile 2012 return is disappointing, but I’m not pinning it on the "new guys." Bob Rodriguez took 2010 off and then came back in more of a supporting role. Yet, we have confidence in managers Dennis Bryan and Rikard Ekstrand. Bryan has been with FPA for nearly 20 years and Rikard for 13, so they aren’t new or inexperienced. The fund, like Royce Value, has been hurt by a big energy investment, but that isn’t out of character with Rodriguez's M.O. This closed fund tends be a good bet in down or flat markets as the firm is still focused on protecting against big losses while making modest gains in rallies.
Vanguard Precious Metals and Mining VGPMX
Yes, the theme continues. Basic materials are having a tough go of it. More striking, though, is that this fund has poor relative performance going over the trailing five-year period. The fund’s unusual combination of mining and metals means its past returns aren’t easy to compare with the precious-metals category or the natural-resources category. In fact, the fund combines metals and mining indexes to create its own custom benchmark, and tellingly the fund is actually ahead of that one for the past 10 years. Graham French is a skilled manager who gives us confidence in the fund even if its relative performance figures aren’t that useful. The fund works best as a broad inflation hedge or play on commodities.
Artisan Small Cap Value ARTVX
This closed fund is a little different. It does have a significant amount in basic materials (10%), but the real driver of red ink is its 34% industrials stake. Names like Ryder R and FTI Consulting FCN were down in 2012. Even tech names like Intersil ISIL and Sykes SYKE have been stung. Thus, stock selection has hurt, too. Yet go out beyond three years and you’ll see top-quintile returns for the past five and 10 years. That’s why we think this is more of a pothole than a cliff.