These 5-Star Stock Funds Had Hiccups in 2012

In investing, as in sports, anyone can have an off year. Baseball players go into long slumps. Professional  golfers develop hitches in their swings. And fund managers place bets that don't pan out, or they play it safe while others are reaping the rewards of being more adventurous.

In a year in which the large-cap-heavy S&P 500 has gained about 16% and the small-cap-dominated Russell 2000 about 14% (through Dec. 17), investors in underperforming equity funds may well feel a little disappointed, though a yearly gain of 10% or so makes for a nice consolation prize. At the same time, funds that underperform one year sometimes are well-positioned to outperform the next, particularly if that underperformance is attributable to sector bets or concentrated portfolios that haven't panned out but that may do so in the future. An extreme example of this ebb and flow is  Fairholme (FAIRX), which lost 32% last year as the financials stocks that dominate its portfolio took a pounding. Fast-forward 12 months and today Fairholme is poised to record a gain of close to 35% this year as financials have rebounded strongly.

Of course, not all funds that stumble are able to recover or stay up for long. But for funds with solid long-term records and strong managers, an off year in an otherwise impressive string of performances is no reason to abandon ship and might even be a reason to add assets. After all, slow and steady wins the race, as the saying goes, and very few funds are able to outperform the competition each and every year. 

To search for equity funds with excellent long-term records and strong managers but subpar 2012 performances, we used Morningstar's  Premium Fund Screener tool and screened on portfolios with Morningstar Ratings for funds of 5 stars, Morningstar Analyst Ratings of Gold or Silver, and below-category-average 2012 performances. The list includes multiple share classes of some funds to allow for the broadest list possible. We also eliminated institutional funds and those that are closed to new investors to identify funds that interested investors can purchase if they so desire. Both load and no-load funds are included, but Premium Members with a preference for no-load funds can add that as a screen. Premium Members can see the full list
 here. Below is a sampling, and next week we'll look at fixed-income funds that have delivered strong long-term returns but that stumbled this year.

 Yacktman (YACKX)   
10-Year Annualized Return: 10.7% | Percentile Rank in Category: 1 | 2012 Return: 12.5% | Percentile Rank in Category: 80      
This large-blend fund's managers look for profitable firms that generate cash, have little debt, and are trading at discounts to what they think the companies are worth (before this year the fund resided in the large-value category). The concentrated portfolio holds fewer than 50 names, with about 16% of assets in cash (as of Sept. 30), in line with its managers' tendency to keep powder dry if they don't see opportunities in the market. Turnover is a very low 3%. Consumer stocks make up more than half of the portfolio, with top holdings including  News Corporation (9.6% of the portfolio),  Proctor & Gamble (PG) (8.1%), and  PepsiCo (7.6%) (PEP). The fund's sparkling long-term record includes top 1st percentile annualized performance during five-, 10-, and 15-year trailing periods. At 80 basis points, annual expenses are below-average for the large-cap no-load group.

 Westport R       
10-Year Annualized Return: 10.6% | Percentile Rank in Category: 16 | 2012 Return: 11.4% | Percentile Rank in Category: 67     
Manager Ed Nicklin looks for mid-cap companies he can buy at a discount due to one-time negative events or restructuring, then holds them for the long haul. Turnover is a low 9%. The fund's 30% stake in large caps is about 12 points higher than the mid-growth category average (the fund had been in the mid-blend category prior to this year), and as of Sept. 30 it held about 12% of assets in cash. Its concentrated portfolio of 50 holdings overweights basic materials, industrials, and technology. The fund may lag during bull markets, but its five- and 10-year annualized returns land it in the top quintile of its category, all while earning a low Morningstar Risk rating, meaning the fund is prone to less downside volatility than its peers.

 Tweedy, Browne Worldwide High Dividend Yield Value (TBHDX)      
5-Year Annualized Return*: 3.0% | Percentile Rank in Category: 10 | 2012 Return: 12.7% | Percentile Rank in Category: 73      
Despite its name, this world-stock fund takes a total-return approach, seeking out good businesses available at fair prices and holding them for long time periods, as evidenced by its low 6% turnover ratio. The fund's 1.9% 12-month yield is lower than that of the S&P 500, and the fund has been adding to its weighting of foreign stocks in an apparent effort to boost income. Foreign stocks account for 66% of assets while U.S. stocks make up just 15%, lower even than the fund's 18% cash stake. The fund tends to outperform during bear markets and overall has delivered above-average returns with a low Morningstar Risk rating. One drawback is the fund's expense ratio of 1.37%, which is above-average for a world-stock no-load fund.

*Fund incepted in 2007

Performance data as of Dec. 17, portfolio data as of Sept. 30