These Recent Laggards Are Still Long-Term Winners
Their 2009 gains may look shabby given the recent rally, but this eclectic group has a lot to offer.
On average, small-, mid-, and large-cap domestic-equity funds are up 58%, 51%, and 45%, respectively, since the market bottom on March 9, 2009. Some domestic-equity funds haven't posted gains anywhere near these percentages, however, though their merits remain in place. Using Morningstar's Premium Fund Screener tool, just a handful of criteria will point to some funds that have been laggards in 2009 but have great long-term potential.
First, we limited the screen to domestic-equity funds that are open to new investments of $25,000 or less and that also sport below-average expense ratios. To spot the recent laggards, we set the screen for funds with bottom-quartile showings for the year to date. We also added the following criteria: minimum manager tenures of 10 years and top-third rankings for the trailing 10-year period. The screen turned up 13 domestic-equity funds on July 31, 2009. To run the screen yourself, click here.
It's certainly not fair to say that these funds got dusted during the recent rally--all have posted double-digit gains since the last market bottom. For example, Keeley Small Cap Value (KSCVX) shot up the most of the funds on this list, registering a 58% return since March 9, 2009. However, the fund is still lagging most peers this year because of the heavy 33% setback it suffered from January 1 through March 8, 2009. Manager John Keeley generally avoids technology stocks because of their short product cycles, so the fund's gains in recent months have been all the more impressive. (Tech stocks have led in the rally.) Instead, concentrating on a handful of market sectors, including energy and infrastructure plays, as well as making good stock picks among firms going through corporate restructuring, has been Keeley's long-term recipe for success.
Other funds that popped up on this list, however, haven't looked nearly as hot during the recent rally. Large-growth fund CGM Focus (CGMFX) is down 1.4% for the first seven months of the year, and its 29% gain since March 9, 2009, lagged the large-growth category average by 13 percentage points. Manager Ken Heebner's lack of exposure to technology firms and a position in PNC Financial Services (PNC) (down 23% for the year to date) in this concentrated portfolio of roughly 20 stocks have weighed on returns in recent months. Investors here can expect that the fund will be concentrated in a few sectors at a time as Heebner uses a market-timing approach. His fast-trading, sector-rotating style has made this one of the most volatile equity funds out there (as measured by standard deviation). That said, Heebner has built a standout long-term record using this approach. This fund could serve as a racy complement to a portfolio, but only for investors who can stay focused on the long-term results.
And don't ignore Brandywine Blue (BLUEX) just because it's been trotting along while its large-growth peers have been racing. For the year to date ending July 31, 2009, this Analyst Pick was just barely in the black with its 0.2% gain. Manager Bill D'Alonzo employs a relatively fast-trading approach to this concentrated portfolio. He and his team of analysts scrutinize firms that are increasing their earnings in a 20% to 30% annual range, and they sell when stocks get too pricey or better opportunities arise. Sticking with defensive fare, including Colgate-Palmolive (CL) and Kroger (KR), contributed to the fund's 18% gain since the last market bottom, which looks paltry compared with the typical large-growth fund's 42% return. Long term, management's brand of momentum investing, which focuses on companies' fundamentals more so than short-term stock-price movements, has been very successful.
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Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.