Last year's big fund laggards rise to the top in first half

Advisers say results don't necessarily show stock-picking acumen

Jul 26, 2009 @ 12:01 am

By David Hoffman

Consumer cyclical stocks, junk bonds, financial stocks and emerging-markets stocks were among the biggest losers last year, but during the first six months of this year, they propelled a handful of mutual funds to the top of the performance charts.

But just loading up on last year's losers, or in some cases stubbornly holding on to them, isn't necessarily an indication of stock-picking acumen, financial advisers said.

Most professional investors know that what is beaten down the most will lead a recovery, said Scott Kays, president of Kays Financial Advisory Corp. of Atlanta, which has $120 million in assets under management.

“Things that were slaughtered do incredibly well,” he said.

But you don't necessarily want to invest in a fund that is highly concentrated in those names, Mr. Kays said.

“It's not where most people want to be,” he said.

Their performance of such funds can be volatile, and volatility can eat away at long-term returns.

A look at some of the biggest winners among actively managed U.S. diversified equities funds at the halfway mark for the year illustrates the point.

The tiny Foresight Value Fund, which has less than $1 million in assets and no ticker symbol, had the best year-to-date return as of June 30 (50.53%), according to Morningstar Inc. of Chicago.

Much of that return was the result of investments in consumer cyclical, financial and technology stocks, said Michael Bissell, manager of the fund and founder of Foresight Asset Management of Katy, Texas, the fund's adviser.

Given government stimulus money, he said, he expects those stocks to continue to do well.

But Mr. Bissell admitted that he has been wrong before.

The fund, which had less than $1 million in assets and no ticker symbol, had a one-year return of -27.99%, putting it in the 58th percentile of its mid-cap-value category; a three-year annualized return of -15.85%, putting it in the 99th percentile; and a five-year annualized return of -7.9%, putting in the 100th percentile.

The $6 million Ancora Special Opportunities Fund (ANSCX), advised by Ancora Advisors LLC of Beachwood, Ohio, had the second-best year-to-date return (43.7%).

Its stellar performance can also be attributed to relatively big stakes in last year's losers, said Richard Schroeder, executive vice president of Schroeder Braxton & Vogt Inc., an Amherst, N.Y., financial advisory firm with $170 million in assets.

It held just 28 stocks, of which more than 29% were financial stocks, according to the most recent data from Morningstar.

But the fund isn't on the hunt to buy yesterday's losers, said Richard Barone, chairman of Ancora Advisors LLC of Beachwood, Ohio, and manager of the Ancora Funds.

It wants to “uncover undervalued situations,” he said.

The fund, however, appears to have met with only limited success.

It had a one-year return of 11.99%, placing it in the 7th percentile of its small-value category; a three-year annualized return of -7.33%, placing it in the 23rd percentile; and a five-year annualized return of -2.63%, placing it in the 65th percentile.

Those aren't terrible long-term results, but they aren't great either, Mr. Schroeder said.

The $12.5 million Touchstone Large Cap Value Fund (TLCAX), managed by Touchstone Advisors Inc. of Cincinnati but subadvised by JS Asset Management LLC in West Conshohocken, Pa., is another example of a recent winner investors should be leery of, advisers said.

It was fifth among all U.S. diversified equity funds, with a year-to-date return of 35.98%.

More than 34% of its portfolio was concentrated in financial stocks, according to the most recent data from Morningstar.

It had a one-year return of -50.33%, placing it in the 99th percentile of its large value category; and a three-year annualized return of -33.17%, putting it in the 99th percentile. It didn't have a five-year annualized return.

But performance has been disappointing, said John Schneider, manager of the Touchstone fund, and president and chief investment officer of JS Asset Management.

But he defended his record, saying that he has successfully managed money for more than 20 years.

Prior to starting JS Asset Management in 2005, he managed $12 billion in assets at PEA Capital LLC, a New York-based division of Allianz Group in Munich, Germany.

It has been a long time coming, but Mr. Schneider said he thinks that his fund will continue to have success going forward, because even though markets have recovered somewhat, stock prices are still depressed.

Financial advisers, though leery of investing in funds too heavily concentrated in today's winners, agree that the markets look better.

And that funds that invest in formerly unloved stocks are doing well is a good indicator that investors are willing to take risk and the markets are beginning to recover, said Chris Cordaro, chief investment officer of RegentAtlantic Capital LLC, a Morristown, N.J., advisory firm with $1.8 billion under management.


Investors, however, shouldn't be too quick to jump into the hottest funds, he cautioned.

“In every recovery, there comes a point where the market gets ahead of the economic news, and we get a pullback,” Mr. Cordaro said. “Did that occur in January or March of this year, or do we have another [pullback] to go?”

If the market is headed for another pullback, investors in those funds that saw big returns during the first six months of the year will likely suffer, Mr. Cordaro said.

It is a balancing act, said Micha Porter, president of Minerva Planning Group Inc., an Atlanta-based firm with $60 million under management.

“The performance of the first six months is reflective of the market bouncing back to roughly fair value from what were valuations that in many cases had priced in economic collapse,” he said. “Some fund managers jumped into financials too soon and lost a boatload, but many avoided financials, found real bargains, and by sticking with their positions, they've done quite well.”

Whether they will continue to do well depends on whether they will be able to read the market correctly — a task that history suggests will be incredibly difficult.

E-mail David Hoffman at


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