Once Lowly Value Funds Are Flying High
In the rip-roaring days of fat double-digit returns, it hardly mattered which mutual fund you bought. Nearly all of them made money. And risk? Who cared what the funds were doing when their net asset values were only going up?
Now, of course, it's different, with the average equity fund down 14.6% in the past 12 months and 8.2% this year. If you didn't pay attention to risk before, you probably are now. That's why you should pay attention to BusinessWeek's mutual-fund ratings.
It takes more than high returns to rate an A from BusinessWeek. We take the total return for each fund, then adjust for risk. Rated over a five-year period, only the top 7.5% get A's. Once annual, the ratings are now updated monthly by Standard & Poor's (which, like BusinessWeek, is a unit of The McGraw-Hill Companies). The ratings are part of a scoreboard of mutual-fund data that can be screened by different criteria. It's all available on the Investing channel at our Web site, www.businessweek.com.
Since the magazine's last ratings review (BW-Jan. 29), we've noticed some interesting changes in the A-list. There is a growing number of value funds--large-cap, mid-cap, and especially those that invest in small-cap value stocks.
Such funds never got caught up in dot-com fever and tend to own more steady, reliable, and perhaps even boring companies. There are fewer growth funds, which tended to own a lot of technology and telecommunications. International funds also are getting scarce, given the relatively poor showing from overseas markets.
The BW online Mutual Fund Scoreboard has data on more than 3,400 equity and 1,700 bond funds. The nice thing about casting as wide a net as we do is that you find gems you would otherwise never discover. Look at the $61 million Osterweis Fund (OSTFX ), which has neither a marketing budget nor a team of brokers to promote it. The fund has earned an average annualized total return of 23.5% in the past five years, with very low risk.
Portfolio manager John Osterweis melds growth and value strategies by "buying rapidly growing companies at depressed prices." Among his top holdings: drugmaker Forest Laboratories (FRX ), energy wholesaler Calpine (CPN ), energy-services provider Kinder Morgan (KMI ), and nursing-home operator Manor Care (HCR ). Another worthy, under-the-radar fund is Meyers Pride Value (MYPVX ). The fund practices a value-style investment strategy, buying companies that have "progressive policies toward gays and lesbians." Its average annual return is 19.1%.
Value managers, downtrodden in the dot-com years, are basking in the newfound attention. "You did well if you ignored the fads and stocks that were sexy," says Ronald Muhlenkamp, portfolio manager of his $500 million, eponymous fund. Muhlenkamp says he earned his five-year return of 20.4% by avoiding health-care and tech companies, sticking it out with a mix of small and large long-running winners, such as Merrill Lynch (MER ), Winnebago Industries (WGO ), and Citigroup (C ). "We haven't changed," says Muhlenkamp, who is based in Wexford, Pa. "It's that the rest of the world is coming our way."
NEW TEAM. As value comes into the limelight, funds that invest in growth are falling by the wayside. Invesco Telecommunications (INTCX ), an A-rated high-flier last year, has taken such a beating--down 34% in the past six months alone--that it's now rated C. But that's a sector fund, always the most volatile in performance and ratings. More diversified funds' ratings don't usually fall so far in such a short time. Gabelli Growth (GABGX ) was an A-rated fund last year; it now is B+, the next-best rating. That's hardly a reason to sell.
It's important not to buy or sell funds on ratings alone. Any ratings system is based on the fund's history, so you have to make some judgments about the future. One oddity on the current A-list is Fidelity Select Electronics (FSELX ), a fund with five-year annualized returns of 29%. This Boston-based sector fund invests primarily in tech stocks--such as Intel (INTC ), Microsoft (MSFT ), and Micron Technology (MU )--and the outlook for that sector remains murky.
Consider deep-value funds Mutual Beacon, Mutual Qualified, and Mutual Shares: All have been on the list before, and all return to the A-list this year. But there's a difference. Star manager Michael Price left active duty in 1998, but he remained on the board and his A-team of managers ran the funds. In October, Price and several of his team will end their relationships with the funds. A new management group could produce different results.
In the bull market, almost all equity-fund managers looked like geniuses. But with the market in flux, only a handful are still providing good returns while managing risk. The BusinessWeek A-list offers you a Who's Who of funds that have been able to distinguish themselves in difficult times.
By Mara Der Hovanesian