Last Month's Leaders Can Be Long-Term Winners

At Morningstar, we're long-term investors, and we encourage you to be as well. But even we get a little guilty pleasure out of mutual funds' short-term performance. Sometimes looking at the short-term leaders' and laggards' boards can even be informative.

That's particularly true when markets are behaving badly--as they have been over about the past month. In general, market indexes peaked around mid-July--and have been bouncing around since then. One day, worries about the subprime mess and its ripple effects will send stocks and high-yield bonds (in particular) reeling. Other days, confidence in the Federal Reserve or other parts of the economy will buoy stocks. All told, the S&P 500 Index is off 7.97% over the past four weeks through Aug. 14, 2007. The Nasdaq Composite has fallen 7.68%. Broad foreign market indexes are generally down between 5.50% and 9%.

The best performers over the past month, not surprisingly, have been those that deliberately bet against the market, primarily bear-market funds. These funds are acting exactly as we would expect them to. While their strength during turmoil may be enticing, we don't suggest investors get out their checkbooks. After all, if you truly doubt that the stock market will rise over the long term, it's better to just be out of it completely or concentrate your stake to a small part of your overall portfolio in a conservative value fund and put the rest in fixed income or other choices. For long-term investors, we just don't think bear-market funds are a necessary part of a diversified portfolio.

And then there are those that easily belong. We took a look at some of the core funds that have performed best amid the recent market turmoil. Many of them are among our overall favorites. While a month is not nearly enough time to declare a fund's approach or management superior, in these cases their short-term performance actually reflects important aspects of their strategy that renders them likely winners over the long haul. Two of the top performing,  Aston/Montag & Caldwell Growth (MCGFX) and  T. Rowe Price New America Growth (PRWAX), are Fund Analyst Picks. A handful of slightly lesser-known options are discussed below.

 John Hancock Global Leaders (USGLX)
This fund has lost only 3.05% over the past month, putting it atop the large-growth category. The compact portfolio of just 25 stocks has been helped by big positions in some resilient mega-cap stocks, including  General Electric (GE) and Johnson & Johnson (JNJ), as well as by gains from  Procter & Gamble (PG) and  PepsiCo (PEP). Something of a poster child for the mega-cap growth stocks that have been out of favor for so long, the fund has subpar three- and five-year results, but it has shined in tough markets including the bear market that began in March 2000. Overall, its fairly stable portfolio of cash-rich firms with predictable, recurring revenues has kept volatility in check, and management's low turnover means its long-term aftertax returns are strong.

 Jensen Fund (JENSX)
Jensen has lost 4.39% in the past four weeks, but it still lands ahead of 97% of its large-growth peers. Like John Hancock Global Leaders, this 25-stock fund takes a long-term view and is full of household names with stable growth and steady profits. Its strategy tends to keep it invested in larger-cap companies, and its insistence on buying stocks at a steep discount to management's conservative estimates of intrinsic value and its willingness to hold cash when investment opportunities are scarce have keep the fund's risk low. The fund isn't just a bear-market darling: It was up 14% in the generally buoyant stock market of 2006.

 Chase Growth (CHASX)
Chase Growth's 4.72% loss over the past month is better than the vast majority of its large-growth rivals'. In some respects, that showing is unexpected. Whereas most of the funds that tend to perform well in downturns could be characterized as cautious and long-term-oriented, this fund uses some aggressive tools, including technical analysis, in building its portfolio, which has at times led to higher turnover. What makes the fund work over the long haul--since its late 1997 inception its annualized return is nearly double that of its average peer--is its well-balanced approach. In addition to quantitative tools, the management team also practices more-fundamental research and analysis. The combination has helped the fund stay disciplined, particularly on the sell side, even when business prospects still look good, and has kept the portfolio full of higher-quality stocks. When both technical and fundamental traits are pointing in the same direction, the managers invest with more conviction.

 Yacktman Fund  (YACKX)
Yacktman's strength during the recent turmoil--the fund's 4.91% setback lands atop the large-value category--isn't surprising at all. The offering has typically done best in tougher markets. It actually made money in 2001 and 2002; during the latter year, it was just one of three large-value funds (and one of those was Yacktman Focused (YAFFX)) to post a gain. Manager Don Yacktman and his comanager and son Stephen Yacktman take a very long-term view, insisting on good businesses trading at a deep discount to their assessment of stocks' business values, and they'll hold cash, currently more than 20% of assets, when they can't find enough to their liking. The fund can fall well behind the competition in times of prosperity; over the long haul, though, the fund has come out ahead.