Fund Times: A Look at the Last Market Cycle's All-Weather Funds

It has been almost six months since the stock market (as measured by the S&P 500 Index) bottomed in early March. While it is anyone's guess as to whether the market will hit fresh new lows in the future, we thought it would be interesting to see which large-cap domestic-equity funds did the best over this past market cycle.

The short-term performance of equity funds is often nothing more than noise. But looking at a full market cycle, and preferably several full market cycles, can give an investor an idea of how a fund behaves in rising and falling markets.

Now, there are a lot of ways to define a full market cycle, but it should include both a bear and bull market. You can go from market peak to market peak, such as September 2000 to November 2007, or from trough to trough, such as October 2002 to March 2009. Both were about seven years, which is a decent amount of time to measure an investment approach.

For this exercise we focused on the Oct. 4, 2002, to March 9, 2009, period (trough to trough). We searched for large-cap actively managed funds (both load and no-load) with at least $100 million in assets as of August to see which did best. We also looked at how some of the industry's biggest and more interesting funds fared. Here they are.

Best-Performing Funds   Anlzd Total Ret (%) 10/4/02 - 3/9/09 CGM Focus    10.1 Amana Trust Growth (AMAGX)   8.75 Amana Trust Income (AMANX)   8.03 Eaton Vance Dividend Builder (EVTMX)   6.78 Vanguard Capital Opportunity (VHCOX)   6.31 Largest Actively Managed Funds     American Funds Growth Fund of America (AGTHX)   1.96 American Funds Invest Co of Am (AIVSX)   0.28 Fidelity Contrafund (FCNTX)   2.96 American Funds Washington Mutual (AWSHX)   -0.93 American Funds Fundamental Investors (ANCFX)   2.59 Dodge & Cox Stock (DODGX)   -1.47 Vanguard Windsor II (VWNFX)   -0.20 Davis NY Venture (NYVTX)   -0.88 Fidelity Growth Company (FDGRX)   4.21 Vanguard PRIMECAP (VPMCX)   4.06 Popular Funds     Fairholme (FAIRX)   3.88 Sequoia (SEQUX)   -1.31 T. Rowe Price Equity Income (PRFDX)   -1.50 S&P 500 Index Fund     Vanguard 500 Index (VFINX)   -1.11

Overall, out of the 662 actively managed large-cap funds with more than $100 million in assets, 396 (or about 59%) were able to beat the Vanguard 500 Index fund over the time period examined. This analysis leaves out the hundreds of poor-performing funds that were either closed or merged away during the same period. For example, almost 400 funds have been closed or merged so far this year alone.

Still, active managers, even those running funds with huge asset bases like the American Funds, acquitted themselves well. The big disappointment on the list is  Dodge and Cox (DODGX), which was hurt by its financial holdings last year.  Sequoia (SEQUX) also was a letdown. The fund held up well last year, but that could not make up for the poor showings it had in 2003, 2004, and 2006.  CGM Focus  was an upside surprise, especially after its total disaster last year (a 48% loss). Strong years in 2005 (up 25%) and 2007 (up 80%) were the reason it was able to hang on to the top spot.

Both Amana funds near the top of the list make a lot of sense, and we would not be surprised if they land near during this next market cycle. Manager Nick Kaiser invests in accordance with Islamic law, which means he holds few companies with meaningful amounts of debt. This is partly why the funds did well last year, as it held few financial companies. But both funds also did well in prior years; each slightly trailed the S&P 500 Index only once since 2002 ( Growth (AMAGX) in 2006,  Income (AMANX) in 2003).

Finally,  Fairholme (FAIRX) and CGM Focus are truly all-weather champions: Both landed near the top of the charts in the trough-to-trough and peak-to-peak cycles. CGM Focus gained an annualized 15.49% from September 2000 through March 2009, and Fairholme returned an admirable 5.5% over that time period. The S&P 500 lost about 7.5% annualized during the same period.

Fidelity and TIAA-CREF Add Index Funds to Target-Date Lineups
Fidelity will soon launch 12 Fidelity Freedom Index funds. The firm already has an actively managed lineup of target-date funds in its Freedom Funds series, which launched in 1996. TIAA-CREF is following suit and will add a similar lineup to its actively managed life-cycle funds.

The new Fidelity Freedom Index funds will be significantly cheaper than their actively managed target-date funds and will have slightly different glide paths. According to Fidelity, all of the funds will have an expense ratio of just 19 basis points. This is just 1 basis point more than the Vanguard lineup of target-date funds, which also employ cheap index funds. Meanwhile, TIAA-CREF's new funds will have an expense ratio between 19 and 23 basis points.

Etc.
RS is losing manager Bill Wolfenden III as of Sept. 1. Wolfenden has been a manager on  RS Smaller Company Growth  since 2001. D. Scott Tracy will remain as the sole manager on the fund until it merges with  RS Small Cap Growth (RSEGX).

One big firm continues its push into ETFs, while another says it is unlikely to enter the ETF space. PIMCO has rolled out its second ETF, a short-maturity Treasury Inflation-Protected Securities fund. The 1-5 Year U.S. TIPS Index Fund is the first of three planned ETFs the firm has that will mainly invest in TIPS. Meanwhile, multiple press reports note that Fidelity president Rodger Lawson has no plans for a big push into ETFs, at least for now. However, because of the fast-growing ETF market, there are internal discussions at Fidelity about whether the firm should follow the likes of Vanguard and other firms, which have made a big push into the market, while they still focus on providing a wide lineup of traditional mutual funds.

ING SmallCap Value Multi-Manager , ING International Capital Appreciation ,  ING International SmallCap Multi-Manager (NTKLX) shareholders should see a significant reduction in their expense ratios if asset levels hold firm. ING is set to waive 50% of its fees for the fund with all of the subadvisors' management fees now coming in at less than 70 basis points.