Funds Betting on Discount Retailers
This is one of the few industries that has benefited from the downturn.
This is one of the few industries that has benefited from the downturn.
Amid the horrendous market downturn of recent months, one industry that has escaped most of the carnage is discount retailers. As the economy has steadily worsened, makers of big-ticket items such as cars have seen their sales fall shaply, while sales at discount retailers such as Wal-Mart (WMT) and Costco (COST) have mostly remained relatively solid, as consumers tighten their belts and "trade down" to buy cheaper things. These retailers haven't been totally immune to the effects of the weak economy, but they've held up much better than most industries. Of the 129 industries that Morningstar uses to classify stocks, discount stores has been the best performer so far in 2008, led by the double-digit gains of Wal-Mart.
You might think that funds with big stakes in this relatively robust industry would be doing well in the current environment, and to a certain extent that's true. The two funds with the largest percentage of their portfolio in the discount stores industry are Rydex Retailing (RYRIX), at 31.14%, and Fidelity Select Retailing (FSRPX), at 18.08%; both are near the top of their categories (mid-cap growth and large growth, respectively) for the year to date. In fact, of the 10 funds with the largest such stakes, seven are specialty funds focused on retail and/or consumer staples, and five of these rank in their category's top decile so far this year--the two previously mentioned plus Vanguard Consumer Staples Index (VCSAX), Fidelity Select Consumer Discretionary (FSCPX), and Fidelity Advisor Consumer Discretionary (FCNAX). The exceptions are ProFunds Consumer Services Ultra (CYPIX), a bottom-decile fund whose use of leverage has magnified its negative returns, and ICON Consumer Discretionary .
However, things are not quite so neat and tidy when we go beyond specialty funds. For one thing, several of the above are index funds dominated by Wal-Mart and other mega-cap retailers such as Home Depot (HD) and Lowe's (LOW), which have done far better than most retail stocks. (Wal-Mart, Home Depot, and Lowe's together account for more than 20% of Rydex Retailing's portfolio.) Several others focus more broadly on consumer stocks, a group that includes some hard-hit names but also relatively strong performers such as McDonald's (MCD) and DeVry (DV). Some diversified funds with big discount retailer stakes have stuck with such safe fare and avoided blowups, but quite a few have not.
The following table shows the 10 diversified funds with the largest stakes in the discount stores industry, including each fund's category, size, year-to-date return through December 10, and percentile ranking in its category:
Diversified Funds with the Biggest Stakes in Discount Retail Stocks | |||||
Category | Size ($Mil) | Discount Stores % | Return YTD | % Rank Cat YTD | |
Clipper (CFIMX) | Large Blend | 1,116.9 | 12.04 | -49.74 | 96 |
Fairholme (FAIRX) | Large Blend | 6,691.8 | 11.78 | -33.08 | 10 |
Sequoia (SEQUX) | Large Blend | 3,113.3 | 11.14 | -27.27 | 2 |
SunAmerica Focused Growth & Inc | Large Growth | 144.3 | 10.34 | -43.24 | 67 |
Aston/Veredus Select Growth | Large Growth | 71.2 | 9.95 | -45.16 | 80 |
AFBA 5Star Large Cap Growth | Large Growth | 31.8 | 9.58 | -46.44 | 86 |
FBP Value (FBPEX) | Large Value | 23.4 | 9.53 | -42.99 | 85 |
Columbia Blended Equity | Large Blend | 168.4 | 9.22 | -37.56 | 36 |
Westcore Select | Mid-Cap Growth | 25.1 | 9.18 | -37.01 | 7 |
American Century Ultra (TWCUX) | Large Growth | 4,950.6 | 9.06 | -42.34 | 59 |
* As of 12-10-2008. |
Some of the funds on this list have indeed performed very well this year, relatively speaking. Fairholme (FAIRX) and Sequoia (SEQUX) have been among the best-performing large-cap funds around, losing significantly less than the S&P 500, thanks to their cautious, Warren Buffett-inspired approaches. In fact, Fairholme has done well in spite of its big discounter stake--that entire stake is in Sears Holdings , which has been hammered. (Sequoia owns TJX (TJX), Target (TGT), and Wal-Mart.) Both Bruce Berkowitz of Fairholme and Robert Goldfarb and David Poppe of Sequoia are among our nominees for Domestic-Stock Fund Manager of the Year.
On the other hand, the top fund on the list, Clipper (CFIMX), has had a terrible year, losing half its value and ranking in the large-blend category's bottom decile. This fund's entire discount-store stake is in Costco, which has lost 22% this year--better than the overall market, but a far cry from Wal-Mart's gains. More importantly, the fund has been dragged down by its big overweight in financials, as well as some ill-timed stock picks. We're still fans of the fund and its managers, Chris Davis and Ken Feinberg, but this has definitely not been their year.
In fact, the majority of the funds on this list have posted lackluster relative returns in this market, and as the example of Fairholme shows, those that have done well have not necessarily succeeded because of their discount retailer holdings. All this illustrates how bad this market meltdown has been, with very few places to hide. Just about everybody agrees that the market will hit bottom and start rebounding eventually, but nobody is sure when that will be; until then, probably the best thing investors can do is hunker down and wait.
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