Three Years After the Bottom: Biggest Fund Winners and Losers

Do you remember where you were March 9, 2009? If you were among the millions of investors watching in horror as the market lost half its value during a 10-month swan dive sparked by a recession and a crisis in the financials sector, you may well have been asking yourself whether things could get any worse. The good news--not that you could have known it at the time--was that they wouldn't.

The market bottom of 6547 for the Dow Jones Industrial Average, three years ago today, marked the nadir of the worst bear market since the 1930s, but also the beginning of a remarkable bull run that today has the Dow, Nasdaq, and S&P 500 all up more than 95% on a cumulative basis since then. Hindsight being 20-20 vision, we thought we'd use this anniversary to look at which fund categories have performed best and worst in the three years since then. Keep in mind that outsized gains can indicate high volatility, and the three-year window we look at here is somewhat arbitrary, so five- and 10-year performance data is a better gauge of how a category has performed over the long haul.

Real Estate Leads Comeback
Although the bursting of the housing bubble helped drive the market's steep decline, the commercial real estate securities that dominate real estate mutual funds fell hard during the bear market, too. The typical real estate fund shed nearly 15% in 2007 and another 39% in 2008. Yet those same hard-hit real estate securities were at the forefront of the market's recovery, as well: No other fund category has averaged higher yearly gains during the past three years.

Real estate funds have returned about 47% annually since the market bottom, far outpacing the three categories jockeying for second place among domestic-stock funds--industrials, consumer cyclical, and small value--all of which have average returns of around 36% annually. For sake of comparison, the S&P 500 has gained about 28% per year in that time frame.

Among real estate funds, PIMCO Real Estate Real Return Strategy (PRRSX) has performed best, with annual gains of around 75%. But despite these eye-popping numbers, investors might want to temper their enthusiasm for the real estate sector. Morningstar's equity analysts estimate real estate stocks are currently slightly overvalued. Click here to see the market fair value graph, then click on the Sector tab and select Real Estate. 

Bringing up the rear among domestic-stock categories are utilities (21% per year), health care (23%), and communications (24%). In 2008, utilities and health care outperformed the market while communications underperformed.

The Latin American Roller Coaster
Despite a lackluster 2011, international-stock funds have seen nice gains since the market bottom. Leading the charge are Latin America stock funds, with annual gains of about 37%, driven by strong growth in Brazil and a resurgence in the basic materials sector, which is a big component of Latin American markets. However, behind this attractive average annual return lies tremendous volatility. The category lost 59.2% in 2008 only to follow that up with an average gain of 115.5% in 2009. Last year, Latin America funds lost 22.6% on average, but so far this year they are up 19.4%. One of the biggest gainers among Latin America funds for the past three years has been JPMorgan Latin America , with average annual returns of about 40%.

Perhaps not surprisingly, the next top performer among international-stock funds since the market bottom has been global real estate at about 33% annually. But unlike the domestic real estate category, international real estate funds faced headwinds from last year's financial crisis in Europe and the earthquake and tsunami in Japan, resulting in a 2011 loss of 10.1%.

Last year's natural disasters also helped make Japanese-stock funds the worst-performing international-stock category of the past three years, with annual average gains of 17%.

High Yield Flies High
Among the legacies of the bear market were enormous inflows to bond funds of all stripes as investors fled stocks for the relative safety of bonds despite rock-bottom interest rates. The leading category among bond funds has been high-yield, or junk, bond funds, returning about 22% on an annualized basis for the three-year period. The European debt crisis and downgrade in U.S. sovereign debt sent jitters through the sector last year, leading to a lackluster 2.8% return. But so far in 2012, it has gained slightly less than 5%, second only to the emerging-markets bond sector at 7%. Top performers in the high-yield bond category since March 2009 have been
 Fidelity Advisor High Income Advantage (FAHDX) and  John Hancock High Yield (JHHBX), at around 32% annually during the past three years. Note that the latter carries a negative Morningstar Analyst Rating in part because of recent management changes and poor five-year performance. The only other fixed-income fund category close to the high-yield sector in annual performance is emerging-markets bond (up about 20% per year).

Bringing up the rear in fixed income, as might be expected, is short-term government bond funds, with a 2.7% annual return, and just above that, the ultrashort bond category at 2.9% per year. Given that interest rates have stayed quite low during the past few years, it comes as no surprise that short-duration bonds generated meager returns.

The three-year anniversary of one of the steepest market bottoms in recent history might not be a cause for popping open the champagne, but then if someone had told you in March 2009 that the market would be where it is today, you might just have felt like celebrating.

Performance data as of March 7, 2012.