They Came, They Saw, They Slumped, They Conquered

Top-ranking funds aren't perennial. Morningstar and other investors, researchers, and fund firms have pointed out that even funds with the most-successful long-term records inevitably look like failures for short periods of time. This is evident among funds with Morningstar Analyst Ratings of Gold, Silver, or Bronze.

Of the 202 rated actively managed funds with manager tenures of at least 10 years and 10-year Morningstar Category rankings in the top fourth of their respective peer groups, 144, or 71%, lagged their peers in at least three of the prior 10 calendar years. If you include funds that trailed their average rivals in two or more annual campaigns you get 183, or 90% of the total. More than half of the funds suffered two or more consecutive years of relative underperformance.

The Downside of Different

It's no coincidence that some of the funds with the longest losing streaks in their still-winning long-term records look quite different from their peers and benchmarks. Bronze-rated

Similarly, Gold-rated

Six years into a bull market, stocks meeting the criterion of these funds' managers have been scarce, so it's not surprising they have experienced slumps relative to their respective category averages. These funds, which continue to put up respectable absolute returns, have tended to make up much of the ground they cede to rivals and their benchmarks in downturns. They were among the best in their peer groups in 2008 and 2011. They can repeat that pattern again.

Undefeated, for Now

Only three actively managed funds in this sample haven't trailed their category peers in any of the past 10 calendar years: Gold-rated

T. Rowe Price Tax-Free High Yield manager Jim Murphy leans toward the cautious side of the spectrum in his category and has finished a few years--namely 2012 and 2010--just few degrees north of average, but overall he has relied on solid bottom-up research and diversification to deliver consistent results. Fidelity GNMA managers Bill Irving and Franco Castagliuolo were runners-up for Morningstar's 2014 Fixed-Income Manager of the Year, partly because of their disciplined approach to getting a lot out of the fund's simple mandate to seek relative value in the government mortgage-backed securities market. Lord Abbett managers Rob Lee and Andy O'Brien have used a mix of top-down and bottom-up analysis to deftly rotate among fixed-income sectors; the fund takes more credit risk than its peers, but the managers have handled it well thus far.

It's likely that even these three funds will lag their peers and benchmarks in the future. There's no telling when that happens, but when it does, history shows that as long as their managers and processes remain in place, it will pay to stay patient.