The Nine Biggest Surprises in Funds in 2007

It has been a turbulent year in the stock and bond markets, as both asset classes have bounced around due to bad news regarding the economy and credit cycle. And in the fund industry, we've seen some very significant personnel changes. Here's a rundown of the events that surprised us the most in 2007.

David Corkins Leaves Janus
Corkins, one of Janus' most experienced, accomplished managers, departed on Nov. 1. This was a big blow to a shop that appeared to be on the rebound; Corkins steered  Janus Growth & Income  (JAGIX) to a fine record before changing jobs twice to help turn around other funds. The announcement came on the heels of news that veteran skipper Scott Schoelzel (manager of   Janus Twenty ) will step down the funds at year-end. And then came news of the departure of rising star Minyoung Sohn (who had taken over Growth & Income).

Jean-Marie Eveillard Back in Action
Another big surprise on the personnel front: Charles de Vaulx, who had taken over several First Eagle funds (including  First Eagle Global  (SGOVX)) in 2004 from longtime boss Jean-Marie Eveillard (who had retired), abruptly departed in March 2007. Eveillard was quickly brought back on board; he's to serve as manager for one year, then gradually scale back his duties over the following several years.

El-Erian Returns to PIMCO
In October 2005, Mohamed El-Erian, PIMCO's highly regarded managing director and senior portfolio manager who specialized in emerging-markets bonds, left to manage Harvard's endowment, a prestigious position. In September 2007, PIMCO announced it had lured El-Erian back to the firm; he'll become co-CEO and co-chief investment officer (along with legendary bond skipper Bill Gross) when he returns in January 2008. That's a coup for the firm, and it provides PIMCO with a clear successor to Gross when he retires.

Fidelity Contrafund Defies Expectations
Veteran manager Will Danoff carries a heavy burden. Between  Fidelity Contrafund (FCNTX), which closed to new investors in 2006, and other vehicles, he's run $90 billion to $100 billion for much of 2007. That's a staggering amount that can make buying and selling stocks an arduous process, and can cause a fund's returns to more closely correlate with those of its benchmark. And yet, spot-on calls on the energy sector, as well a bets on  Apple (AAPL), and BlackBerry maker  Research In Motion (RIMM) have powered the fund to a 22% gain for the year to date through Dec. 10--more than double the return of the S&P 500 Index, this fund's bogy.

Fidelity's Abby Johnson Once Again a Contender
In 2005, Abby Johnson, the daughter of longtime Fidelity chairman Ned Johnson, switched roles at the firm, from heading up of its money management arm (the firm's flagship business, which was struggling at the time) to running a division that oversees administration for retirement plans. Although the latter division handles a lot of business for Fidelity, the move was seen as a demotion of sorts, and called into serious question whether she would take over for her father when he retired. However, she recently took on a higher profile again--in September, she was tapped to run a new unit that will market Fidelity's funds, in addition to her other responsibilities. Between that move and the departures of other potential successors Bob Reynolds and Ellyn McColgan, Abby Johnson may again be the favorite to take over the firm.

Conservative Fixed-Income Funds Rocked by Subprime Troubles
The subprime mortgage crisis had a direct, immediate impact on lower-quality debt, but eventually led to trouble among even higher-rated bonds.  Fidelity Ultra-Short Bond  , for example, which keeps its interest-rate sensitivity low and generally hasn't been volatile, has suffered a 5% loss through Dec. 10--that's a big decline for such a conservative fund. Also, a number of money market funds, which aim to keep a stable net asset value of $1, held paper affected by the subprime debacle, and had to be bailed out by their management companies to avoid "breaking the buck."

Growth Stocks Rebound--but Not Mega-Caps
After lagging value stocks for seven consecutive years, growth stocks finally took the lead again in 2007. However, while many--including us--expected steady-growing, recession-resistant businesses to lead the way when value faltered, investors instead turned to faster-growing companies with lofty price multiples, particularly within the tech sector. Thus, many funds that focus on steady-Eddie fare have continued to fare poorly, while aggressive growth offerings such as  Fidelity Growth Company (FDGRX) have thrived.

Same as It Ever Was?
Some of the same types of equities that had performed remarkably well in recent years have continued to crank out big gains in 2007, despite warnings about stretched valuations and a potential reversion to the mean. Foreign stocks have extended their run of dominance over their U.S. counterparts as the dollar has continued to decline; the typical foreign large-blend fund has gained 14% through Dec. 10, doubling the gain of domestic large-blend funds. More specifically, emerging-markets stocks have had another remarkable year--the typical diversified emerging-markets fund is ahead 37% (and gained at least 23% in each of the four previous calendar years). Finally, as oil prices flirted with the $100 mark, energy funds are working on their fifth consecutive year of outsized gains and energy-heavy diversified funds have also flourished.

The Markets Soldier On
Despite all the turmoil in 2007--a housing slowdown, subprime mortgage issues, skyrocketing oil prices, and a sputtering economy--stocks and bonds have still churned out reasonable gains with just three weeks left in 2007. The S&P 500 Index has risen almost 9% for the year to date through Dec. 10, and the Lehman Aggregate Bond Index has notched a 6% gain.