Who Tops the Fund Company Performance Rankings?

We're catching our breath after a great rally following a horrific sell-off. Who's ahead of the game when you add those years up? Looking at how fund companies did as a whole is a great way to see which firms' research efforts have advanced and which haven't.

Fund companies with strong performance in an asset class provide fertile hunting grounds for new investment ideas. Meanwhile, if you invest with a firm that posted very weak returns, you should worry about the support that your fund is getting.

How We Ran the Data
We looked at relative performance rankings (how a fund did versus its category peer group) over the past three years at funds offered by the 25 largest fund companies. Then we averaged those rankings by asset class and overall. We weighted the average based on assets so that larger funds counted for more. Then we compared that figure with the previous three-year period to see what the trends were.

As you're reviewing the results, remember that, with our percentile rankings, the lower the number the better. A figure of 36 means the funds outperformed 64% of their peers. I averaged percentile ranks instead of total returns because it works better for comparing across categories.

Ideally, a fund company's funds would score well in both time periods, which indicates that they are sustaining excellence. However, some of the more interesting stories are those that have shifted dramatically. I'll highlight those that improved the most and those that lost ground as well as the steady-Eddies. Because trends can reverse, I'll give you my take on whether they have staying power.

Asset Weighted Average Three-Year Category Ranks
for the Largest 25 Fund Families

Excludes institutional share classes.
Three-year weighted percentile performance of the 25 largest fund companies. 1=best 100=worst

On the Rise
American Century
It didn't top the ratings, but it was most improved. I was surprised to see that under-the-radar American Century had rebounded so strongly. It popped from a 62 ranking to 37 despite the fact that it's been a difficult time for momentum funds. However, much of that improved performance came in 2007 and it has leveled off since. The most dramatic improvement came in domestic equity, which improved 25 percentile ranks on average. A look at its three biggest U.S. stock funds will illustrate what's going on there.

 American Century Ultra (TWCUX) has been a middling performer over the past three years as it has suffered from the departure of two lead managers and three comanagers. The fund neatly represents the challenges faced by American Century: attracting and retaining top talent and adapting momentum investing in the face of fierce competition from hedge funds.

On the flip side,  American Century Equity Income (TWEIX) was a bear-market hero. Its 20% loss in 2008 was better than just about any other large-blend funds as a slug of bonds and cash, plus a light weighting in financials, helped the fund hold up better than most equity-income funds. However, that same mix has it way behind the competition so far this year, but its three-year figure remains top-decile.

 American Century Growth (TWCGX) also boasts solid returns and experienced management that dates back to 1997, though the two most recent additions to the four-person team came on board in 2005. Also, the growth team lost its chief investment officer, Steve Lurito, this spring. Lead managers Greg Woodhams and Prescott LeGard look for fast earnings growth like most American Century growth managers, but attention to valuations has helped make this fund a steadier investment than most.

On the Rise
MFS
Many scandal-tainted firms have been unable to pull themselves up by the bootstraps, so it's a welcome sight to see broker-sold MFS hitting on most cylinders. In the wake of big bear-market losses and market-timing misdeeds of the early 2000s, it quietly beefed up its research efforts, consolidated me-too funds, and instilled greater discipline in the way funds were run. That sounds like the game plan of many damaged firms, but MFS has executed it much better than the rest.

MFS has improved performance dramatically in domestic stocks, foreign stocks, balanced funds, and munis. Only taxable bonds have slipped. Chief investment officer Michael Roberge has overseen admirable consistency in personnel, strategy, and performance. Consider that 15 of its 20 largest funds have top quartile three-year performance; only one didn't make the top half.

PIMCO
PIMCO was ahead of the curve on the housing and mortgage meltdown, and it rode that foresight to great results last year across a wide swath of funds. Its improvement is more impressive than American Century's because it was already outperforming and now it ranks above everyone else. This year,  PIMCO Total Return's (PTTRX) performance is rather middling, but it's in the top 2% for the trailing three-, five-, and 10-year periods. If you're wondering why PIMCO is bringing in new inflows by the barrelful, wonder no more.

Besides the bond funds, Rob Arnott's allocation funds such as  PIMCO All Asset  did quite well. The only weak performer was  PIMCO Commodity Real Return Strategy , which was hurt by the steep drop in commodity prices last year and its overlay of Treasury Inflation-Protected Securities. And even that one is a good fund.

Janus
Janus shot up 11 notches in the rankings, but it was starting from a high 32 figure, and its funds now average an outstanding 21. Just as impressive is that it landed in the top quartile in all bond and stock asset classes, demonstrating some depth beyond growth equity funds. But maybe the most impressive thing is that it has rebounded so strongly from scandal and a horrific performance in the previous bear market. Many wondered how it would hold up in the next bear market, and the answer is: pretty good. Like American Century, however, Janus also has suffered some key manager departures. Its largest two funds,  Janus Twenty  and  Janus , each got new managers a little over a year ago. On the plus side, Twenty's Ron Sachs and Janus' Jonathan Coleman are experienced managers with solid records at other Janus funds. Their success and that of other Janus funds is also a credit to recently departed CEO Gary Black's efforts to shore up research, but we had confidence in the previous managers and are sorry to see them gone.

Steady-Eddies
Sustaining steady outperformance is the grail of investing, so it's not surprising that these two are among the surest bets for the core of a portfolio. These firms were close to the top third for this period as well as the previous. The winning formula is long-term orientation, low costs, and very stable management.

T. Rowe Price
T. Rowe Price runs lower-risk strategies that have worked well through a lot of markets. It also has tremendous stability in its management ranks, and it sticks to its style. Over the past three years, T. Rowe's bond funds have produced improved performance as their emphasis on high quality and low leverage have been a boon. Domestic stocks remained strong, and international stocks remained middling. Balanced funds dropped off from top decile to top third, but that's still respectable. The consistency across funds is encouraging. All of T. Rowe's 20 largest funds have top-half performance.

Vanguard
In the last three years, performance at Vanguard's taxable-bond funds improved, and its domestic stocks slipped. Still, both types were strong over both periods. As with T. Rowe, Vanguard's conservative plain-vanilla approach to bond investing was vindicated by a market that punished credit risk, complexity, and leverage.

Vanguard's index funds hurt domestic stock performance a bit because they don't hold cash and because smaller stocks did better than mega-caps. Still, you can best judge an index fund's prospects by costs and diversification--not past performance--so I'm not concerned.

Three That Declined
Dodge & Cox
Dodge has so few funds that rolling up their performance isn't all that necessary. You don't really need an average of five. It leaned too hard on financials and got burned, but we're seeing the funds rally sharply this year. I still have faith. (I own  Dodge & Cox Income (DODIX) and  Dodge & Cox International Stock  (DODFX).)

Oppenheimer
Performance tailed off across the board at Oppenheimer, but there's a big distinction between its international stocks group and its bond funds. The bond funds fell off a cliff with a slew of leverage and huge credit risks. They've overhauled their effort, made some manager changes, and put in risk controls.

International stocks, on the other hand, only fell to top third, still a strong showing. Their international group is a small-but-excellent team using thematic growth investing.

Oppenheimer's domestic stock effort has been more middling and thus less dramatic than the other groups. Still, sluggish returns at flagship  Oppenheimer Main Street (MSIGX) led the firm to bring in Mani Govil from RS to run the fund in May.

AllianceBernstein
The financials meltdown hit AllianceBernstein right between the eyes as many of its equity funds had a rough 2008.  AllianceBernstein Growth & Income (CABDX) lost 41% in 2008, and it has only gained 15% so far in 2009. The story is pretty similar at  AllianceBernstein Value (ABVYX).  AllianceBernstein International Value (ABIAX) is up 34% this year, but it lost a brutal 54% in 2008.

The firm's muni funds did hold up nicely last year, but I'm not sure that's enough to satisfy investors.

This is an excerpt of an article that originally appeared in Morningstar FundInvestor.

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