Skip to Content
Fund Spy

How'd They Do That?

Few funds outperformed in both 2008 and 2009. Here are two that did.

As investment learning opportunities go, the crash (and recovery) course the market provided between 2008 and 2010 is advanced-placement material. One of the many lessons learned was that what didn't go down also didn't go up, at least in relative terms, as the market seesawed between collapse and a massive rally. Still, while you'd expect the funds that fared well during 2008's downturn to have underperformed during 2009, there are outliers, funds that outclassed the competition in both market environments.

Exceptions to the Rule
All told, a review of the funds in Morningstar's database finds 48 diversified domestic-equity funds that ranked in their respective categories' top quintiles during both 2008 and 2009. That's an impressive feat, of course, but the devil's in the details.

Small-blend fund Catalyst Value (CTVAX) and large-growth concern FBR Large Cap Investor (FBRPX) were among the outperformers in both calendar years, for example, but each grew cautious as the year wound down, closing out 2008 with uncharacteristically large cash positions.

The venerable  Yacktman (YACKX), however, grew bold. Its average cash position hovered above 10% through most of 2008, but during the year's fourth quarter, the management team went shopping as the market sold off, putting virtually all of its money to work by the end of the year. Amid 2008's stampede to safety, the fund's showing owed substantially to its quality bias.  Coca-Cola (KO),  PepsiCo (PEP), and small-cap concern Lancaster Colony (LANC)--financially healthy dividend-payers all--were among the fund's top 2008 picks.

Yet Yacktman did even better in 2009, claiming the peer group's top spot during a rally paced by lower-quality stocks. The fund enjoyed outsized gains that year with  Liberty Media (LINTA), not a wide-moat concern but a company with a healthy balance sheet nonetheless.  Microsoft (MSFT) and  eBay (EBAY) were big winners, too, and both appeared among the fund's top holdings in 2008.

 John Hancock US Global Leaders Growth  (USGLX) enjoyed similar success in 2008. The fund's 35% loss was awful in absolute terms but nevertheless qualified for the large-growth category's top decile--and the fund was virtually fully invested throughout the entire year.

As with Yacktman, the Hancock fund's showing came as no surprise. Led by the team at subadvisor SGA, the fund favors the kind of high-quality companies that held up best as the market crashed. At the end of 2008, for example, its portfolio included outsize stakes in free-cash-flow kings such as  Staples (SPLS),  Procter & Gamble  (PG), and payroll processor  Automatic Data Processing (ADP), each of which provided a bit of a cushion as the market swooned.

The fund's 2009 performance, however, is another story. Amid the year's junk rally, it earned more than 44%, shellacking the S&P 500 by nearly 18 percentage points. The fund bested its typical rival by more than 8 points and surpassed 2009's best-performing diversified domestic-equity category (mid-growth) by more than 5 points, too. True, the fund booked a chunk of its relative victory in the year's early going when the market was still in decline. It enjoyed success later in the year, however, with  Apple  (AAPL),  (AMZN), and  Starbucks (SBUX), 2008 pickups that met management's quality criteria, looked dirt-cheap during the downturn, and ranked among the fund's big contributors in 2009.

Common Traits, No Tricks
Neither fund's performance was done with mirrors: Both stayed true to their strategies in 2009. On closer inspection, two other shared attributes help to account for these funds' against-the-odds success: fundamental, valuation-sensitive approaches to stock selection and relatively compact, best-ideas portfolios. Yacktman currently sports 43 names, with a mere 10 of them soaking up more than 55% of assets. The team at John Hancock US Global Leaders Growth, meanwhile, owns just 30 companies, allocating roughly 42% of assets to its top 10.

That kind of concentrated, high-conviction investing magnifies success, but the tack courts volatility, too--at least in theory.

In practice, for the 15 years though Nov. 30, 2010, Yacktman has been only modestly more volatile than the broader stock market as gauged by standard deviation. John Hancock US Global Leaders Growth has actually been less volatile. During that stretch, each fund has delivered superior performance, too, with the former snagging top honors in the large-value peer group over the period. The latter hovers near the large-growth category's top quartile.

Prudent Risk
This year, both funds have notched decent absolute returns while putting up far less impressive relative numbers. That's no cause for concern, though--just further evidence that no strategy can succeed in every market, despite what these funds were able to accomplish in 2008 and 2009.

Success during that stretch owed not only to deft stock selection, but also to a winning solution to the "quality risk" problem I wrote about in my last column. When you avoid risk in terms of the kinds of names you favor, you're freed up to place your risk bets elsewhere.

In the case of these two funds, the managers--bolstered by confidence in their high-quality holdings--were well-positioned to take on concentration risk via best-ideas, high-conviction portfolios. In 2008 and 2009, and over the long haul as well, the rewards of that approach have been clear.

Shannon Zimmerman has a position in the following securities mentioned above: AMZN. Find out about Morningstar’s editorial policies.