The best-performing mutual funds of 2010, determined by Bloomberg Rankings, pursued a lively assortment of investment strategies. The 18 winning funds' specialties range from precious metals and U.S. real estate to emerging market small-cap plays, global high-yield bonds, and preferred securities. A doubly leveraged silver exchange-traded fund beat all of the actively traded funds. Small-cap stocks were top performers in regional and international fund holdings. Global bond returns lagged those in purely U.S. aggregrations.

That was last year. What about now? To find out what strategic stances helped 2010's top mutual funds outperform their peers—and how many managers have changed or tweaked their winning strategies early in the new year—Businessweek.com interviewed more than a dozen fund managers in search of timely insights and picks.

To find the top mutual funds of 2010, Bloomberg Rankings began with broad categories—global bonds, U.S. bonds, U.S. equities, global equities, and emerging markets—and then drilled down to categories such as regional funds, international funds, large-, mid-, and small-cap funds, and sectors with both higher returns than the Standard & Poor's 500-stock index and a sizable pool of funds to choose among. Sectors with reasonable returns but only a few eligible funds were excluded. Municipal bond funds, despite having lower returns, were included because they're of special interest to high-net-worth individuals. Funds were ranked by total return for the calendar year. See the following slides to find out how these funds excelled last year—and what they're doing differently this year.
Getty/Netflix/CIA Hering/Coinstar/Finisar
The best-performing mutual funds of 2010, determined by Bloomberg Rankings, pursued a lively assortment of investment strategies. The 18 winning funds' specialties range from precious metals and U.S. real estate to emerging market small-cap plays, global high-yield bonds, and preferred securities. A doubly leveraged silver exchange-traded fund beat all of the actively traded funds. Small-cap stocks were top performers in regional and international fund holdings. Global bond returns lagged those in purely U.S. aggregrations.

That was last year. What about now? To find out what strategic stances helped 2010's top mutual funds outperform their peers—and how many managers have changed or tweaked their winning strategies early in the new year—Businessweek.com interviewed more than a dozen fund managers in search of timely insights and picks.

To find the top mutual funds of 2010, Bloomberg Rankings began with broad categories—global bonds, U.S. bonds, U.S. equities, global equities, and emerging markets—and then drilled down to categories such as regional funds, international funds, large-, mid-, and small-cap funds, and sectors with both higher returns than the Standard & Poor's 500-stock index and a sizable pool of funds to choose among. Sectors with reasonable returns but only a few eligible funds were excluded. Municipal bond funds, despite having lower returns, were included because they're of special interest to high-net-worth individuals. Funds were ranked by total return for the calendar year. See the following slides to find out how these funds excelled last year—and what they're doing differently this year.
Getty/Netflix/CIA Hering/Coinstar/Finisar

How 2010's Best Mutual Funds Are Investing

Where the Top Mutual Funds Are Investing in 2011
Where the Top Mutual Funds Are Investing in 2011
The best-performing mutual funds of 2010, determined by Bloomberg Rankings, pursued a lively assortment of investment strategies. The 18 winning funds' specialties range from precious metals and U.S. real estate to emerging market small-cap plays, global high-yield bonds, and preferred securities. A doubly leveraged silver exchange-traded fund beat all of the actively traded funds. Small-cap stocks were top performers in regional and international fund holdings. Global bond returns lagged those in purely U.S. aggregrations.

That was last year. What about now? To find out what strategic stances helped 2010's top mutual funds outperform their peers—and how many managers have changed or tweaked their winning strategies early in the new year—Businessweek.com interviewed more than a dozen fund managers in search of timely insights and picks.

To find the top mutual funds of 2010, Bloomberg Rankings began with broad categories—global bonds, U.S. bonds, U.S. equities, global equities, and emerging markets—and then drilled down to categories such as regional funds, international funds, large-, mid-, and small-cap funds, and sectors with both higher returns than the Standard & Poor's 500-stock index and a sizable pool of funds to choose among. Sectors with reasonable returns but only a few eligible funds were excluded. Municipal bond funds, despite having lower returns, were included because they're of special interest to high-net-worth individuals. Funds were ranked by total return for the calendar year. See the following slides to find out how these funds excelled last year—and what they're doing differently this year.
Getty/Netflix/CIA Hering/Coinstar/Finisar
ProShares Ultra Silver Fund
ProShares Ultra Silver Fund
Fund Ticker: AGQ

2010 Return: 173.6 percent

Strategy: This exchange-traded fund is backed by physical silver. Its performance corresponds to 200 percent of the daily performance of silver, the price of which is set on the London Bullion Market by three market-making members—Bank of Nova Scotia-ScotiaMocatta, Deutsche Bank, and HSBC Bank USA—based on supply and demand interest

Top contributors to 2010 returns: Silver bullion, whose spot price surged 80.3 percent in 2010 to end the year at $30.72 per troy ounce.

Portfolio Changes for 2011: None
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Oppenheimer Gold & Special Minerals Fund
Oppenheimer Gold & Special Minerals Fund
Fund Ticker: OPGSX

2010 Return: 54.5 percent

Strategy: A focus on mining companies with high-quality gold reserves. Roughly half its assets are in large-cap producers with a history of stable production volumes and earnings. Few holdings are pure-play gold producers—most sell byproducts that reduce overall production costs. Mining company shares respond more vigorously to changes in gold pricing than the physical commodity does, says portfolio manager Shanquan Li

Top contributors to 2010 returns: Red Back Mining, which was bought by Toronto-based Kinross Gold (KGC) in September 2010; Andean Resources, an Argentina-based producer acquired by Vancouver-based Goldcorp (GG) in December 2010

Outlook for 2011:
A lack of confidence in currencies around the world and increasing jewelry demand in China and India will continue to support gold, says Li. Mergers and acquisitions will remain key for companies to replace resources; notwithstanding the large influx of capital into the sector, global gold production increased by a mere 1 percent to 2 percent in 2010
Andean Resources Ltd.
American Century Global Gold Fund
American Century Global Gold Fund
Fund Ticker: BGEIX

2010 Return: 44.8 percent

Strategy: About 75 percent of fund assets are in large- or mega-cap producers. With gold prices trading as high as $1,423 per ounce, much of the risk has been removed from production, says fund manager Bill Martin, and more countries are giving exploration companies access to rich mineral deposits

Top contributors to 2010 returns: Silver Wheaton (SLW), which acquires silver and gold production through long-term purchase agreements with mining companies in the U.S., Mexico, and half a dozen other countries; Canaco (CAN:CN), a gold mining company with promising reserves in Tanzania

Portfolio Changes for 2011: Enormous gains in cash flow margins have spurred many gold producers to start paying dividends of 1.5 percent to 2.0 percent, boosting gold's competitiveness with fixed-income investments, says Martin. He says he would look to increase his exposure to smaller "wildcat drillers" in the event of a pullback in share prices. Flagging confidence in central bank and governmental monetary policies makes Martin optimistic that gold prices will move higher
Silver Wheaton
Wasatch Emerging Markets Small Cap Fund
Wasatch Emerging Markets Small Cap Fund
Fund Ticker: WAEMX

2010 Return: 41.2 percent

Strategy: The fund holds about 150 companies with an average market cap of $900 million to $1 billion. The focus is on economies whose structural changes are spurring growth in sectors that include railroads, infrastructure, and consumers. The fund wants companies with superior capital efficiency, low debt-to-equity ratios, and ample cash to pay dividends. India's financial sector is a favorite. With consumer use of credit very low, mortgage lenders have good growth opportunities

Top contributors to 2010 returns: CIA Hering (HGTX3:BZ), a Brazilian casual clothing retailer; Mayora Indah (MYOR:IJ), a confectionary company in Indonesia

Portfolio Changes for 2011: Despite signs that large-cap emerging market stocks are starting to outperform small-caps, the fund plans to stick with an underweight position in energy and basic materials companies relative to the MSCI Emerging Markets Index's 30 percent exposure. It will stay focused on high-quality growth companies that trade at reasonable valuations with more exposure to domestic markets than to exports, says Roger Edgley, one of the fund's co-managers
CIA Hering
Weitz Hickory Fund
Weitz Hickory Fund
Fund Ticker: WEHIX

2010 Return: 38.7 percent

Strategy: Weitz looks for companies with market caps under $10 billion and sufficient cash flow to support paying a dividend, reinvesting in the business, or making acquisitions. It targets stocks selling at a 40 percent to 50 percent discount to their value as privately held businesses. The fund's top 10 stocks are 42 percent of assets; 24 percent is invested in fairly short-term U.S. Treasury bonds

Top contributors to 2010 returns: Liberty Media (LCAPA), which contributed $9 billion of the $75 billion the fund gained in asset value; Coinstar (CSTR), whose shares tripled over the past four years, largely due to its Redbox DVD distribution subsidiary. The fund sold Coinstar in the low 50s

Portfolio Changes for 2011: With the global economy improving slowly and unevenly, the fund considers all companies vulnerable to potential shocks. If European countries are seen in danger of defaulting on sovereign debt and the stock market falls 10 percent to 20 percent, lots of companies will be cheaper for no company-specific reasons. "That's when we'd hope to redeploy that 24 percent cash," says manager Wallace Weitz
Coinstar
U.S. Global Investors Global Resources Fund
U.S. Global Investors Global Resources Fund
Fund Ticker: PSPFX

2010 Return: 38 percent

Strategy: Looks for oil and gas producers with large resource bases and scale in regions that the fund's managers judge safe from repatriation threats or punitive tax levels. Also targets companies with smaller market caps, relative to their resource base, that can generate cash for shareholders by bringing in partners or selling certain assets to other producers. In 2010 the fund benefited from a 22 percent weight in gold mining companies in the year's first half, vs. its typical 10 percent exposure

Top contributors to 2010 returns: Pacific Rubiales Energy (PRE:CN), a Toronto-based oil-and-gas producer in Colombia and Peru; HRT Participacoes em Petrole (HRTP3:BZ), an onshore Brazilian oil and gas producer

Portfolio Changes for 2011: Although copper and other industrial metals continue to benefit from favorable supply/demand imbalances, copper prices are so high that it may be time to rotate out of copper producers back into gold producers, says fund co-manager Brian Hicks. The fund has 15 percent in cash
Pacific Rubiales Energy
Parnassus Small-Cap Fund
Parnassus Small-Cap Fund
Fund Ticker: PARSX

2010 Return: 37.4 percent

Strategy: The fund looks for environmentally and socially responsible companies selling at two-thirds or less of intrinsic value, which manager Jerome Dodson determines by calculating discounted cash flows and various price ratios. A company is also a candidate if its price-to-book or price-to-sales ratio is below its average for the past five years

Top contributors to 2010 returns: Finisar (FNSR), a designer and manufacturer of optical components used to boost interconnectivity in local area networks (shares up 233 percent in 2010); Ciena (CIEN), which provides communications networking equipment, software, and services to support voice, video, and data traffic over the Internet (shares up 94 percent in 2010)

Portfolio Changes for 2011: Dodson is reducing exposure to telecom equipment manufacturers and buying homebuilders, including Toll Brothers (TOL). Homebuilder stocks are cheap because high unemployment is hurting demand. Still, says Dodson, home prices remain inexpensive, low interest rates support the market, and the 300,000 homes under construction are far short of the estimated 1.2 million new units needed within a couple of years
Finisar
RS Technology Fund
RS Technology Fund
Fund Ticker: RSIFX

2010 Return: 36.2 percent

Strategy: Invests in companies whose innovative products and services are gaining market share because they improve efficiency. The portfolio is split evenly between large-, mid-, and small-cap companies, but co-manager Allison Thacker says it has greater expertise in small- and mid-caps than most of its peers. The fund looks for misunderstood and undervalued stocks but also owns some that are growing faster and more expensive

Top contributors to 2010 returns: Akamai Technologies (AKAM), which provides services that accelerate content delivery over the Internet; Isilon, a designer of scale-out data storage systems, which was acquired by EMC (EMC) in November 2010, having climbed 150 percent since the year began

Portfolio Changes for 2011: No major changes. The fund has been adding to a handful of larger holdings, including Google (GOOG), Oracle (ORCL), and Alcatel-Lucent (ALU). Overall, Thacker regards tech valuations as reasonable and expects their earnings growth rates to remain strong
Isilon systems, Inc.
Matthews Asia Small Companies Fund
Matthews Asia Small Companies Fund
Fund Ticker: MSMLX

2010 Return: 35.5 percent

Strategy: The fund is biased toward high-quality companies with strong domestic-consumption growth. Fund manager Lydia So prefers companies with little or no debt, strong cash flows, and perhaps dividends. She also looks for companies that can capitalize on structural changes in emerging economies, such as those in the pharmaceutical industry. At the end of 2010, one-third of assets were in Chinese stocks and nearly 19 percent were in Indian companies

Top contributors to 2010 returns: St. Shine Optical (1565:TT), a Taiwan-based manufacturer of disposable contact lenses, with annual revenue growth over 20 percent; Ipca Laboratories (IPCA:IN), an Indian manufacturer of cardiovascular and central nervous system drugs that earns 40 percent of revenues from its domestic market

Portfolio Changes for 2011: Wary of inflationary pressures on raw material costs, So continues to look for companies that will benefit from heightened pricing power as their brands grow stronger. Health care, at close to 10 percent of her portfolio, is her biggest overweight position relative to its 5 percent share in the benchmark
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Delaware Smid Cap Growth Fund
Delaware Smid Cap Growth Fund
Fund Ticker: DFCIX

2010 Return: 35.0 percent

Strategy: Buys companies undergoing such changes as a fresh management team, a shift to a higher-return business model, or a spinout. It typically owns fewer than 30 stocks. A handful of these, including Weight Watchers International (WTW), Peet's Coffee & Tea (PEET) and Techne (TECH), consistently deliver high single-digit to double-digit gains that tend to insulate overall returns from external market shocks, resulting in lower volatility than characterizes peer funds that hold more stocks

Top contributors to 2010 returns: Netflix (NFLX); VeriFone Systems (PAY), the largest global provider of debit/credit card swipe terminals, whose announcement in December 2007 that it would restate earnings for the first three quarters of fiscal 2007 created an opportunity to buy the shares at a sharp discount

Portfolio Changes for 2011: The managers have doubled their bet on Strayer Education (STRA), the fund's biggest laggard in 2010. They're betting that millions of students who need greater flexibility around work schedules and can't access traditional colleges will enroll in schools such as Strayer now that the government has relaxed rules to allow interest-only loans to be consolidated with other student loans
Netflix
John Hancock Small Cap Intrinsic Value Fund
John Hancock Small Cap Intrinsic Value Fund
Fund Ticker: JHIAX

2010 Return: 35.09 percent

Strategy: The fund looks for companies selling at distressed price levels "with hidden value" and downside protection because of the free cash and high returns on capital they generate. The managers like to own companies that might become targets for private equity investors

Top contributors to 2010 returns: Domino's Pizza (DPZ); Retail Ventures (RVI), which owns a controlling stake in specialty shoe retailer DSW (DSW), but was trading at a 35 percent discount to DSW when the fund bought it in late 2009

Portfolio Changes for 2011: The fund is adding to some positions in companies with dividend yields above 15 percent and abundant free cash, such as Collective Brands (PSS), a specialty footwear retailer that could be debt-free in two years, according to the managers. Company brands Saucony, Stride Rite, Sperry, and Keds are all taking market share from bigger rivals such as Nike. The fund is also buying companies with clean balance sheets and significant cash dividends in the financial and technology sectors
Bloomberg
JPMorgan U.S. Real Estate Fund
JPMorgan U.S. Real Estate Fund
Fund Ticker: SUSIX

2010 Return: 30.4 percent

Strategy: Specialized research from a large team of analysts enables the fund managers to more accurately value a pool of properties and better gauge REIT valuations so they can avoid overpaying for holdings, says Kenneth Statz, one of the fund's portfolio managers. Early research predicting that blue chip property owners would be able to borrow at much lower rates in 2010 than in 2009—leaving more cash for distribution to shareholders—prompted the fund to go heavily overweight in high-quality names. Overweight positions in multifamily apartment building REITs and storage REITs, relative to benchmarks, boosted returns when apartment rents began to rise earlier than had been anticipated

Top contributors to 2010 returns: Apartment Investment & Management (AIV), a real estate investment manager focused on multi-family buildings; on Jan. 31, 2011, ProLogis (PLD), the world's largest owner of warehouses, announced a merger with AMB Property (AMB) that will result in share conversion to AMB stock

Portfolio Changes for 2011: The fund is shifting 5 percent to 10 percent of assets from growth names that pay low dividends to REITs with low- or no-growth prospects, but which pay dividend yields ranging from 5 percent to 7.5 percent. Statz expects the portfolio to earn a return of about 10 percent in 2011
Prologis
John Hancock II High Income Fund**
John Hancock II High Income Fund**
Fund Ticker: JHAQX

2010 Return: 26.7 percent

Strategy: Portfolio manager Arthur Calavritinos looks for companies restructuring and offering bonds at a discounted price in order to pay off debt. He likes industries in which supply is becoming constrained because reduced supply generates good economic returns for companies that can survive. He's willing to wait a few years for the full value of an investment to unfold. The fund portfolio's overall yield was 7.65 percent at the end of 2010

Top contributors to 2010 returns: United Continental Holdings (UAL) 6 percent bond, maturing Oct. 15, 2029 (bought at a 70 percent discount in 2009 and now trading at par because airline earnings have bounced back); Sirius XM Radio (SIRI) 7 percent bond maturing Dec. 1, 2014

Portfolio Changes for 2011: The fund plans to reduce exposure to leveraged bank loans and put more money into corporate restructurings and other parts of companies' capital structures that offer better opportunities as volatility rises. It will maintain 2010 industry weights, including 21.5 percent in airlines and 21 percent in media companies

*Available only as part of Hancock Lifestyle Conservative and Moderate Funds
United Air Lines
Columbia Select Large Cap Growth Fund
Columbia Select Large Cap Growth Fund
Fund Ticker: ELGAX

2010 Return: 24.1 percent

Strategy: By investing in just over two dozen companies, the fund's managers try not to dilute the earnings potential of any stock, while reducing the volatility associated with high correlations among stocks. The team looks for companies it believes will attain sustainable high earnings growth, driven by innovation and low cost structures, and that will be able to increase market share

Top contributors to 2010 returns: Amazon (AMZN); Illumina (ILMN), a manufacturer of genetic sequencing products used in labs and medical centers

Portfolio Changes for 2011: The fund managers are more optimistic about technology stocks than consumer stocks because tax credits for accelerated depreciation on capital equipment are expected to spur greater business investment in technology and infrastructure, slowing new hiring. The fund is adding to its position in pharmacy benefit manager MedcoHealth Solutions (MHS), anticipating substantial growth in generics once such branded drugs as Lipitor go off patent later this year
Illumina Inc.
Nuveen Preferred Securities Fund
Nuveen Preferred Securities Fund
Fund Ticker: NPSAX

2010 Return: 18.7 percent

Strategy: The fund invests mostly in preferred and hybrid securities, exploiting pricing inefficiencies. At the end of 2010 it had a 48.5 percent weight in A-rated securities, a 42 percent weight in BBB-rated securities, and a 6.75 percent weight in BB-rated securities. The credit rating risk in the fund is less than what it appears, according to fund manager Douglas Baker, because the credit ratings of the issuers—85 percent of which are banks and other financial institutions—tend to be three to five notches higher than the securities

Top contributors to 2010 returns: JPMorgan Chase (JPM) 7.9 percent preferred; Allianz (ALV:GR) 8.38 percent preferred

Portfolio Changes for 2011: Given the possibility that economic growth could stagnate, Baker favors preferred stock over trust-preferred and enhanced trust-preferred securities, the alternative structures in which he invests; each pays interest that accrues until maturity, rather than a regular dividend, as preferred stocks do
Allianz SE
Prudential Jennison Health Sciences Fund
Prudential Jennison Health Sciences Fund
Fund Ticker: PHLAX

2010 Return: 18.4 percent

Strategy: The fund managers declined to comment on their strategy, top contributors to the 2010 returns, or changes in positioning for 2011. Stock price changes weighted by share counts for 2010 indicate that its two top holdings, Incyte (INCY) and Alexion Pharmaceuticals (ALXN), were the biggest contributors to its 2010 performance
Getty IMages
Pioneer Global High Yield Fund
Pioneer Global High Yield Fund
Fund Ticker: PGHYX

2010 Return: 18.2 percent

Strategy: Because the fund looks at the complete capital structure of a company, it is more diversified than standard high-yield portfolios, with leveraged loans, convertibles, and non-government agency asset-backed bonds among its holdings. Asset-backed bonds lent a big boost to 2010 performance since they didn't suffer the corrections that periodically afflicted most high-yield debt returns last year, says fund manager Andrew Feltus

Top contributors to 2010 returns: WESCO International's (WCC) convertible preferred 6 percent maturing Sept. 15, 2029, which were bought at 67¢ on the dollar in 2008 and exchanged for new bonds when they reached 93¢ on the dollar and par in August 2009. The new bonds rallied from 122¢ to 206¢ on the dollar in 2010, tracking the equity higher; Industrias Metalurgicas Pescarmona's 11.25 percent bonds maturing Oct. 22, 2014. IMPSA is an Argentine engineering company that designs and makes wind turbines, hydro mechanical generators, and valves

Portfolio Changes for 2011: Feltus plans to trim his position in asset-backed securities and believes that leveraged loans, which lagged in 2010, will be among the better performers in 2011. Much as he wants to increase exposure to junk bonds in emerging markets from a 22 percent weight, he says it's hard to find companies paying sufficiently high yields to compensate for the risk. Feltus is adding tax-exempt high-yield corporate bonds issued through the municipal market, including airline bonds guaranteed by airport gates and maintenance facilities
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Pioneer High Income Municipal Fund
Pioneer High Income Municipal Fund
Fund Ticker: PIMAX

2010 Return: 6.9 percent

Strategy: More than 80 percent of the fund is in below-investment grade muni bonds, but these are tax-exempt revenue bonds issued by public companies and secured, in most cases, by assets such as airport gates, terminals, and maintenance facilities. Stand-alone, private-pay, continuing-care retirement community bonds that aren't tied to Medicaid or Medicare reimbursement account for 30 percent of the Fund

Top contributors to 2010 returns: Returns largely resulted from deeply discounted purchases made in early 2009, says portfolio manager Timothy Pynchon: AMR's (AMR) Chicago O'Hare ARPT Special Facility Revenue 5.50 percent bond maturing Dec. 1, 2030, and Ohio ST Solid Waste Disposal Revenue 5.65 percent bond maturing Mar. 1, 2033

Portfolio Changes for 2011: With an average coupon of 7.19 percent (a taxable-equivalent yield of over 11 percent) and average price of 80¢ on the dollar, the fund could earn a return of around 15 percent in 2011, Pynchon says. Since the muni sell-off, he's been a "selective seller" to fund roughly $50 million in redemptions. Once money comes back, he plans to resume buying deeply discounted revenue bonds for airlines, life-care facilities, and other high-quality companies. Solid waste includes gypsum, a mined substance found in sheetrock.
USG Corp.