Topnotch Bargain-Hunting Funds

Uncertain market conditions drive some investment managers to amp up their cash stakes and wait by the sidelines. Other managers, meanwhile, use periods of market uncertainty as an impetus to go shopping, buying what other investors are dropping.

To help identify truly active bargain-hunting managers who have successfully found opportunities amid market turbulence and company-specific problems, we turned to our  Premium Fund Screener. We homed in on both the domestic and foreign value fund categories with underlying stocks of small, medium, and large market capitalizations. To winnow our list to funds run by the most talented and veteran managers, we required that managers have more than a decade of experience at the helm and that their funds rank in the top quartile of their categories for the trailing 10-year period. On the fees front, we eliminated load funds with expense ratios above the category average. And to further weed out funds that move in lock step with their indexes, we called up funds with lower-than-average R-squared figures. (R-squared measures an investment's correlation with an index or other investment.) Finally, to whittle the list down even further, we screened for distinct portfolios of each fund.

This screen yielded seven bargain-hunting funds, three of which we highlight below. To replicate this screen,  click here.

 American Century Value (TWVLX)
Managers Phil Davidson, Michael Liss, and Kevin Toney look for healthy companies that are trading below their estimate of fair value as a result of short-term concerns. For example, they bought asset-management companies that investors found unattractive because of market conditions. They also hung on to top holding  Johnson & Johnson (JNJ), noting that its recent string of product recalls doesn't diminish the company's core strengths. Armed with this strategy, the managers strive to achieve a moderate return in rising markets while limiting downside losses, a balance that they have achieved successfully. During the bear market from late 2007 through early 2009, the fund held up much better than its category peers, and it went on to post respectable absolute returns during 2009's rally.

 Oakmark International (OAKIX)
Manager David Herro subscribes to a decidedly contrarian style. He invests in beaten-up stocks that trade at discounts of at least 40% to his estimates of their intrinsic value; this strategy is based on his belief that over the long haul, these stocks are bound to recover. Investors should keep in mind that Herro does not shy away from emerging markets and some smaller-cap names; he'll also make sizable sector and country bets when they seem profitable. All of these qualities have the potential to court additional risk, but Herro has managed this fund's risks successfully. Due in part to his standout results here, Oakmark International ranks as one of Morningstar's Analyst Picks, and the analyst team also named him Morningstar's International Manager of the Decade for 2000-09. This manager eats his own cooking, too, with more than $1 million invested in this fund. Investors can therefore rest assured that his incentives are aligned with those of the shareholders.

 Tweedy Browne Global Value (TBGVX)
Comanagers William Browne, John Spears, Tom Shrager, and Bob Wyckoff are experienced investors with an eye for value across the market-cap spectrum and geographic borders. This foreign large-cap value fund sticks to a value discipline, investing in companies with healthy balance sheets whose prices are below their estimates of fair value. As Morningstar fund analyst Kevin McDevitt notes, "[management] would rather pay a fair price for a good business, than a low price for a mediocre one." Management hedges its foreign-currency exposure back into U.S. dollars, and that can hold the fund back during times that foreign currencies gain an edge over the dollar. But for low-risk exposure to global stocks, this fund merits a place on investors' radars.