Russel Kinnel looks at which funds in the Morningstar 500 produced a top-percentile performance during the past year and why.
A while back, I wrote about top- and bottom-performing funds based on total returns. With 2013 in the books, I thought I would write about the top and bottom on a relative-performance basis. I limited it to funds in the Morningstar 500 but did not exclude unrated or Neutral funds. Here are our top performers.
All told, 11 Morningstar 500 funds produced top-percentile returns in 2013. See the table below for their 2013 performance as well as their current Morningstar Analyst Ratings. Nine of the 11 are Medalists, one is not rated, and one we recently dropped to Neutral.
I'll focus on why each fund performed like it did, but to find out whether you should buy the fund, be sure to read the analysis of each fund's fundamentals.
Artisan International Value ARTKX
This closed Gold-rated fund had a remarkable year, as did Oakmark InternationalOAKIX, the fund that Artisan managers David Samra and Dan O'Keefe used to serve as analysts. Like a lot of foreign-value managers, Samra and O'Keefe were smitten with many European names outside of the eurozone. In fact, the top six names were either British or Swiss. Names like TE Connectivity TEL and Reed ElsevierENL were big winners.
Berwyn Income BERIX
This fund flourished despite having a 30% ceiling on its stock weighting. Strong stock selection with names like Pitney Bowes PBI and Methode Electronics MEIhelped Berwyn Income make up ground on its peers. In addition, the fund's bond portfolio really outperformed because it favors corporate bonds over Treasuries.
Dodge & Cox Balanced DODBX
That's one heck of a comeback from a rough 2008. A bias toward corporate bonds over Treasuries helped on the fixed-income side. Dodge also leaned toward the maximum weighting of around 75% for equities, which proved to be the right call. The fund had some big wins in financials as well as value tech names like Microsoft MSFT and Hewlett-Packard HPQ.
Fairholme Focused Income FOCIX
If we had a strangest fund of the year award, this one might take the prize. Bruce Berkowitz's super concentrated bond fund turned out a 29.9% gain in 2013. The fund owned only debt in MBIA and Sears SHLD, and it paid off big time when MBIA reached a $1.7 billion settlement with Bank of America BAC. Today, the fund appears to own just Sears, Fannie Mae, Freddie Mac, and J.C. Penney JCP debt. It's closed to new investors, and that's probably just as well after its huge gain in 2013.
Morgan Stanley Focus Growth AMOAX
This is another rebounding fund. Dennis Lynch had endured a couple of tough years, but the fund smoked the competition in 2013. Big Internet plays led the fund to a gain of 49.55%! (Is it 1999?) Specifically, the fund has a top four of FacebookFB, Amazon AMZN, Google GOOG, and Priceline PCLN. The fund also joined Morningstar's Ultimate Stock-Pickers in the first half of 2013.
Primecap Odyssey Aggressive Growth POAGX
The Primecap team runs a patient low-turnover approach, but it still has the potential for big years. In 2013, a slew of biotech and other health-care names launched this fund into the stratosphere. This Gold-rated fund had long run under investors' radar despite its great pedigree. But now they've found it, and assets are up to $5 billion. Here's hoping it closes soon.
Skyline Special Equities SKSEX
This quiet fund remains off investors' radar screens with less than $1 billion in assets. Management runs a classic blending of value and growth characteristics, and it owns a healthy dose of micro-caps along with small-cap names. It didn't ride the health-care wave in 2013, but owned an eclectic bunch of rather cyclical names like MDC Partners MDCA and Quality Distribution QLTY.
T. Rowe Price Media & Telecommunications PRMTX
This fund has some things in common with Morgan Stanley Focus Growth. It, too, scored big with Internet stocks. It also has some telephone and cable TV plays, but the likes of Amazon and Priceline are what led the way. We actually lowered our rating to Bronze from Silver in May because manager Dan Martino was moving on to T. Rowe Price New America Growth PRWAX.
Third Avenue Real Estate Value TAREX
So, this fund's 16.4% return isn't much compared with most funds on this list, but considering its category averaged a mere 2.9% return, I'd say props are definitely in order. Michael Winer is an untraditional real estate investor. He emphasizes real estate operating companies rather than REITs. Thus, he missed out a bit on some of the yield-chasing that drove up REITs in recent years, but that strategy is what led him to better values that turned out to be big winners in 2013, including some from unusual corners such as Lowe's LOW and Taylor Wimpey. That offset some sluggish performance from the fund's Hong Kong names.
Vanguard Capital Value VCVLX
Although Vanguard has tried to tone down the drama at this fund, it's still the antithesis of Vanguard's index funds or even its super diversified actively managed funds. The Bronze-rated fund's awesome 43.86% gain and top-percentile ranking in 2013 fits a pattern. It has been either top-decile or bottom-decile in each of the past seven years. Wellington's Peter Higgins has an extreme growthy value strategy that favors tech over typical value sectors. Thus, Vanguard brought in another Wellingtonian, David Palmer, to run a separate sleeve and diversify the portfolio. Even so, it has been rather extreme.
Vanguard Precious Metals and Mining VGPMX
That's right, a 35.13% loss gets you first place in the downtrodden precious-metals category. This fund diversifies beyond precious metals to other mining and natural-resources names, so it tends to outperform when gold stinks and to lag when it rallies. We took the rare step of downgrading it to Neutral all the way from Gold after manager Graham French left the fund.
Today's Laggards, Tomorrow's Top Performers
I'm writing about the best and worst performers in the Morningstar 500 because I know those are the ones you have the most questions about. That said, if you are aiming to own the funds that make next year's list of top performers, you might do better to look at Medalists that had lagged in 2013. Many of the funds on this list rebounded from poor results in 2011 or 2012.
Note on Total Returns
The return data cited are through year-end, but the figures won't be final for another day, so it's possible the rankings or returns will change slightly in our official final data.