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Fund Spy

Five of Our Favorite Comeback Candidates

Can these funds go from the outhouse to the penthouse?

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Unless you've been hiding under a rock, you're all too aware that it's been a lousy 12 months for stocks. The credit and liquidity crunches kicked off by the implosion of lower-quality mortgages and a slowing economy have caused a lot of pain for investors: For the year ended Sept. 9, 2008, the MSCI U.S. Broad Market Index declined 13%, and some of our favorite funds have done substantially worse.

Those are the kinds of results that make investors want to toss out their statements unopened and avoid looking at funds at all. But just as some of the savviest value managers we've talked to say they benefit greatly from the buying opportunities presented by a bear market, fund investors can do the same by scooping up some real gems when they're down and out.

True, the situations aren't completely analogous with stocks and funds that are down. Funds that have seen big losses sometimes ditch stocks that haven't worked out, only to see them rebound sharply as fundholders miss out on those gains. But big rebounds do happen in the fund world, particularly when the managers and approaches haven't changed. Managers' strategies and favorite sectors go in and out of favor; the best time to buy is when they've hit bottom. Certainly, it's been a winning formula in the past--just look at all the value funds that were left for dead in the late 1990s, only to rise with a vengeance once valuations started to matter again. They included such long-term standouts as  American Funds Washington Mutual (AWSHX),  Clipper Fund (CFIMX), and  Longleaf Partners (LLPFX). (The latter two funds show up on the list below, although one has a different set of managers now.)

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.