Three Top Managers Having Lousy Years

About a month ago, we explored the case of a very prominent fund manager whose fund's lackluster 2006 return relegates it to the very bottom of its category rankings. But, as it turns out, Bill Miller of  Legg Mason Value (LMVTX) is not the only well-respected domestic-stock manager whose fund currently sits in (or near) the 99th percentile of its category for the year to date.

Investors know they should not attach much significance to one-year results, but when a fund you own (or have considered owning) has sunk to the bottom of the year's performance chart, it's understandable that you'd want to know what's up. In short, what accounts for the lousy showing, and, more importantly, is the fund still worth owning?

We addressed those issues for Legg Mason Value on Halloween and concluded that Bill Miller certainly hasn't lost his touch, this year's results notwithstanding. Here, we'll take a look at three other domestic-stock funds with highly respected managers who currently find themselves in the same situation. The good news for shareholders of these funds, as with owners of Legg Mason Value, is that there is no reason to panic about any of them.

 FPA Capital 
Those of you who own this fund probably know that manager Bob Rodriguez's unusual style can easily lead to periods when the fund will lag its counterparts by substantial margins. So the fact that the fund sits in the 97th percentile of the small-value category for the year to date through Nov. 21 may not come as a shock. In fact, the fund landed in just about the same place in 2004. But it rebounded to the top percentile in 2005--repeating the pattern it followed in 2000 and 2001.

As Rodriguez explains in his just-released shareholder report, this year the culprits have been a high cash stake, which held back performance as the stock market rallied, and poor showings from several energy-related holdings (a large percentage of the portfolio), such as  Rowan Companies  and top-five holding  Patterson-UTI Energy (PTEN), which is down 20%. But Rodriguez remains firmly attached to his strategy, arguing that holding cash is the only sensible option when he can't find enough companies that meet his strict criteria. And he has added to his stakes in both Rowan and Patterson-UTI, as well as other underperformers. He remains convinced of the case for energy, believing high energy prices are here to stay.

We're confident that this closed fund will continue to reward investors over the long run. True, as this year's showing confirms once again, it's almost guaranteed to trail well behind its rivals from time to time. But long-term investors should focus on the long term--not yearly rankings.

 Muhlenkamp Fund (MUHLX)
It doesn't get any worse than this: For the year to date through Nov. 21, Muhlenkamp Fund is in the large-value category's 100th percentile. (We recently moved the fund to that grouping from the mid-value category, owing to the trend of its portfolio.)

In general, the problem has been that manager Ron Muhlenkamp, who incorporates a significant amount of big-picture thinking into his analysis, has been optimistic about economic growth, and that's reflected in the makeup of the portfolio. Many stocks that relied on that trend performed quite well in recent years, helping propel the fund to great returns from 2003 through 2005, but they took it on the chin in 2006. In fact, the portfolio's top 25 sports seven different double-digit losers. Like Rodriguez, Muhlenkamp has been bullish on energy, which has hurt this fund in 2006 as it has FPA Capital. Housing-related stocks have been another drag.

Muhlenkamp's long-term success inspires confidence, though. He has been running this fund since 1988 and has proved his abilities over the long run. The fund's trailing 10-year return is in the 2nd percentile of the group. Moreover, that record owes to a sound contrarian, low-turnover strategy that he has stuck with through thick and thin.

Those who can ride out the tough times are likely to enjoy solid results over the long term as shareholders have in the past.

 TCW Select Equities (TGCEX)
Managers Steve Burlingame and Craig Blum aren't as well known as Rodriguez or Muhlenkamp. In fact, they've only been running this fund themselves officially for two years. But before that, they worked with longtime leader Glen Bickerstaff until he stepped aside at the beginning of 2005, and, significantly, they are part of the all-star multimanager lineup that runs Masters Select Equity. If that's not enough, this fund's $3.7 billion asset base guarantees that a certain number of readers are asking this question right now: What's with the 97th-percentile rank in the large-growth category for 2006?

In this fund's case, steep losses in disparate holdings that take up a substantial share of this concentrated portfolio are to blame. Most notable is the 21% loss suffered by auto insurer  Progressive (PGR), which was 6.6% of the most recent portfolio, and a 22% decline in  eBay (EBAY), which took up more than 4% of assets. Those sore spots offset some noteworthy success stories such as top holding  Google (GOOG).

Although the shorter track record of these managers doesn't allow us to supply a vote of confidence as strong as that we can give to Rodriguez and Muhlenkamp (and Miller, for that matter), we still think their strategy, honed under Bickerstaff, will pay off in the long run. Their low-turnover style is refreshing for a growth team; they show no indication of panicking when something doesn't work out right away or trying to simply jump on whatever stock or trend is showing market momentum, a tough game to win consistently. However, the concentrated structure of this fund will inevitably lead to some rough spots even if the long-term performance is fine. Be ready for that.