Honey, I Shrunk the Rally

Now that the S&P 500 has regained the heights it last reached nearly six years ago, you might expect that your core equity fund also has finally recovered its bear-market losses. You'd be right, for the most part. More than 85% of large-blend funds, which often use the S&P 500 as their primary performance yardstick, now show positive results from the index's previous Oct. 9, 2007, high through April 1, 2013.

The 15% that remains underwater includes some large, widely held funds. Steep financial-crisis losses combined with sluggish performance in the subsequent rally have hindered their recoveries. Is it time to cut your losses and move on? The answer, of course, depends on the fund. A look at some of the largest funds that still haven't made it all the way back shows that you have to look beyond the performance of recent years because many of these laggards aren't the same funds anymore.

Restructuring Play
Normally,  Hartford Capital Appreciation's (ITHAX) poor showing since the S&P 500's Oct. 9, 2007, high point would not be too worrisome. Sure, some lousy financials and industrials picks killed it in 2008, and too many European stocks and not enough consumer staples stocks in 2011 didn't help. Overall, the fund with $12 billion in assets posted a slight loss from Oct. 9, 2007, to April 1, 2013, while the S&P 500 gained more than 2.0% and its typical rival 1.4%. Its long-term record under benchmark- and style-agnostic opportunist Saul Pannell, however, remains remarkable. The fund has gained 12.6% annualized from its 1996 inception through April 1, 2013, double the return of the typical large-blend fund and more than 5 percentage points better than the S&P 500.

The problem is that changes are afoot. A new manager of managers will gradually take over the bulk of the duties at this fund over time, turning it into a more wide-ranging portfolio built by multiple stock-pickers working independently. Like Pannell, the new team members all work for subadvisor Wellington Management and include managers who have achieved success elsewhere. Still, it is these impending changes, rather than the fund's recent underperformance, that knocked the fund's Morningstar Analyst Rating to Bronze from Silver late last year.   

Just Right?
 Fidelity Growth & Income (FGRIX) is on its third manager since the previous S&P 500 high. The $6.3 billion fund has been too bold, then too tame, and, since early 2011, just about right. Under one former manager, the fund was too aggressive in 2008, snapping up doomed financials too early and losing more than half its value. Under another manager, the fund was too cautious and indexlike during the equity market's initial rebound, barely keeping pace with its benchmark and category average from 2009 to 2011.

So current manager Matthew Fruhan isn't responsible for most of this fund's nearly 3% annualized loss from Oct. 7, 2007, through April 1, 2013. Unlike previous managers, Fruhan also actually pays attention to income. He aims to at least match the the S&P 500's yield. The shift has worked out well, so far. Since he took over Feb. 4, 2011, the fund has showed signs of improved stock-picking across sectors, styles, and market-cap ranges and has gained 12.0% annualized versus the typical large-blend fund's 8.8% gain and the S&P 500's 11.0%. This was enough to edge the fund to Bronze from Neutral, but don't get too excited about a couple of years of decent performance.

Still Untamed
Janus Contrarian (JACNX) also is under new management and is somewhat tamer than the $2.8 billion fund was when it shed nearly half its value in 2008. It's no Caspar Milquetoast, though. The fund that is still down more than 1% since the S&P 500's October 2007 high point remains pretty concentrated, has a huge overseas stake relative to other large-blend funds (more than 5 times the category average), and is willing to invest in dicey, out-of-favor companies. The currently unrated fund, which Daniel Kozlowski took over from David Decker in July 2011, has more than 40% of its assets in companies with high fair value uncertainty ratings and more than a fourth of its assets in businesses with no competitive advantages, or without economic moats, according to Morningstar equity analysts. In comparison, the  Vanguard Total Stock Market Index (VTSMX) has about a fourth of its assets in high fair value uncertainty companies and 12% in no-moat companies. Approach this one with caution.

I wrote about other big funds that still haven't recouped their bear-market losses--including the Neutral-rated Legg Mason Capital Management Value (LMVTX) and   CGM Focus --last fall near the fifth anniversary of the market's October 2007 peak. Last month, I also revisited the struggles of  Clipper Fund (CFIMX), which contributed to its recent Analyst Rating reduction to Silver from Gold. (Tuesday's rally actually turned this fund's returns positive, albeit barely, for the period.) See below for the full list of funds that as of April 1 remained in the red since October 2007.