( By Russel Kinnel) It isn't pretty to see a fund in a nasty slump.
Investors' anxiety levels go up and managers feel pressure to produce a
turnaround. Since we're past the halfway point for 2012, I thought I'd
check in on five once-strong funds that were struggling at the end of
2011. I looked for funds with very poor three-year returns at that point
and then pulled their year-to-date returns through July 18. Let's take a
look at these funds and what their performance this year tells us.
CGM Focus(CGMFX)
The hardest hit of our five funds, it had a three-year annualized loss
of 1.6% at the end of 2011, the worst of any large-growth fund in our
database. Unfortunately, it has stayed in the cellar this year after a
brief early rally. It has gained 0.6%, which places it in the bottom 2%
of the category. With a turnover rate north of 400%, it's not easy to
say exactly what has gone wrong, but it appears one problem has been a
bet on a stronger economic recovery than has materialized. Manager Ken
Heebner's superfast moves and focused portfolio make the fund a tough
one to own. His unpredictable and uninformative shareholder letters mean
that it is hard for people to understand how he's positioning the fund.
A second issue is that Heebner has very little support and is past
retirement age. The positive is that, despite awful recent results,
Heebner does have a pretty good long-term record. Still, you have to
take a huge leap of faith to buy this fund.
Fairholme(FAIRX)
Bruce Berkowitz has gone from outhouse to penthouse. Fairholme's 5.6%
annualized return was one of the worst in the large-value category at
year-end, but a buoyant 22.7% rebound for the year to date has given the
fund the best returns of any U.S.-equity fund outside of those using
leverage. The fund's trailing five- and 10-year returns both rank in the
category's top quintile. Unlike CGM, it's pretty clear what has
happened. Battered names like American International Group(AIG), Sears(SHLD), and Bank of America(BAC)
have rebounded brilliantly and are clearly the cause and solution to
Fairholme's problems. It's encouraging to see that Berkowitz wasn't as
far off in his analysis as the market was saying he was a year ago.
That said, the portfolio is still quite aggressive in that it owns
some highly concentrated deep-value plays. Smooth sailing now doesn't
mean forever. It is still a good fund but only if you plan to hold for
10 years or more.
Brandywine(BRWIX)
Brandywine's claim to fame once was that it was a momentum fund with
better defense than its competition. However, it has since performed
poorly in all environments. The fund's 3.4% annualized return put it in
the bottom 2% of its mid-growth category at year-end, and it has
continued to struggle this year. Its 5.25% year-to-date return lands
just over the line in the bottom quartile. Brandywine attempts to use
human intelligence to sniff out trends faster than the rest of the
world. That's a hard game to play as many other people are trying the
same thing, and the fund continues to struggle to gain an information
edge. As I wrote a couple of years ago, Brandywine follows a strategy
that's difficult to execute well, and it's hard to make the case that
the fund will improve as information moves faster and faster. Yes, I'm
sure it will have its moments, but probably not enough.
Artio International Equity(BJBIX)
Artio's 0.8% annualized return over the three years ended 2011 landed it
in the bottom 3% of its peer group. This year it still hasn't found its
groove, posting a meager 2.4% return. Like many individual investors,
management has bet on emerging markets even as the developed world has
outperformed. Specifically, the fund has triple the foreign large-blend
category's emerging-markets weighting. The fund has 9% in China, 4% in
Russia, and 4% in Hong Kong, which is a developed market but obviously
one that is closely tied to China.
Historically, Rudolph-Riad Younes and Richard Pell have made
excellent country calls, but that hasn't been the case of late. The
positive case is that there doesn't appear to be a reason they can't
return to their winning ways, and an emerging-markets rally could
quickly perk up performance at this fund.
Schneider Value(SCMLX)
Arnie Schneider aims to pluck deep-value stocks that are in trouble but
will escape bankruptcy and rebound to regain their former health. That's
a very difficult thing to do well, and Schneider's bets have not worked
well. This year, coal stocks plus Navistar(NAV) and Dell(DELL) have
undermined gains in the financials sector. The fund's 2.3% year-to-date
return places it in the bottom 2% of its category following a
three-year record of 10.5% annualized that was in the bottom 4% of the
mid-value category at year-end.
As with Brandywine, I'd imagine this fund will have its moments, but
it seems to need a really robust economy to thrive as the issue
selection hasn't been strong enough to boost the fund on its own.
Russel Kinnel is Morningstar's director of mutual fund research. He is also the editor of Morningstar FundInvestor,
a monthly newsletter dedicated to helping investors pick great mutual
funds, build winning portfolios, and monitor their funds for greater
gains. (Click here for a free issue). Mr. Kinnel would like to hear from readers, but no financial-planning questions, please.