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7 Equity Funds on the Comeback Trail

One lesson that investors have learned the last 18 months is that the economic downturn didn’t discriminate between good funds and bad funds — every offering seemed to take a beating.

Recently, though, we’ve seen some fund managers dust themselves off and get on the comeback trail. These funds were in the basement of their peer groups during 2008, but now find themselves leading the pack over the trailing three-month period. That’s not exactly enough time to proclaim a complete turnaround — but the gains are large enough that investors are starting to take notice.

This week we searched for equity funds that were in the bottom 25% of their Morningstar categories during 2008. Then we looked to see which of those funds were in the top 25% of those same groups in 2009. We also added in fee criteria and favored funds whose parent companies have good reputations and whose managers have a history of posting decent performance. Below are seven funds we think are back on the right track.

Fund managers may take issue with us proclaiming they’re in turnaround mode. After all, one year or three months doesn’t make or break a fund. Indeed, reports have shown that every fund manager who outperforms inevitably lags his or her benchmark at some point, too. That said, it does pay to see how funds manage in times of crisis and, more importantly, it’s also smart to see how their managers steered them out of the situation.

If you take a quick look at the table you will see that these funds are easily beating the broad market. There is a simple, partial explanation for that rise. The Dow Jones Industrial Average has gained more than 1,900 points since bottoming out at 6440 during trading on March 9. According to Lipper, the fund-data tracking company, over the last three months through Thursday, every broad-focused equity fund category is outpacing the average S&P 500 index fund’s 7.5% gain. Good stock ticker picking could account for some of that performance. But also keep in mind that the 30% run-up in the broad market has essentially lifted all boats.

The big question is whether this run is sustainable. The increase in stock tickers was spurred by a number of factors: A spotty earnings season that was poor but not as bad as originally expected; the release of bank stress test results that showed none of the country’s big institutions would fail (although some needed to raise more cash); and economic data that seemed to shift from positive to negative depending on the day of the week. All that added up to a perfect environment for speculators — not exactly a great foundation to build on.

“We are more bullish than we were at the end of the year,” says Paul Ahern, senior vice president at Wealth Trust-Arizona. But, he adds, “we fully expect some profit taking heading into the summer.”

That risk led us to add another layer to our screen. To truly determine if a fund can pull off a dramatic turnaround, it helps to see how it did coming out of other downturns. So we also went back to the 2002 bear market to see how funds did during the following year. The offerings on the table below all outpaced the broad market during 2003.

The Hodges fund (HDPMX) lost 49.5% last year vs. roughly a 37% drop for the S&P 500. However, during the trailing three-month period it’s up 12.4%, almost four percentage points ahead of that same benchmark. The fund performed in a similar manner during the previous bear market: In 2002 it lost 26.3% but then came roaring back with an 80% gain during 2003. Don and Craig Hodges, the father-and-son team that runs the fund, use a simple rule in these situations: Buy what was strong going into the initial downturn because those stock tickers will soar sooner when things improve. The duo is also pairing holdings in the fund in order to concentrate on their best ideas. They’ve done well recently with stock tickers like Transocean (RIG), Chesapeake Energy (CHK) and Gamestop (GME).

The Criteria: The equity funds on our table were in the bottom 25% of their Lipper peer groups during 2008, but in the top 25% of those same categories so far in 2009. They are open to new money, require a minimum investment under $5,000 and charge an annual expense ratio under 1.5%. We also favored funds whose parent companies have good reputations with financial advisers and whose managers have proven track records. We did not include load funds.

Call It a Comeback?
Fund Ticker 3-Month
Return
(%)
2008
Return
(%)
2002
Return
(%)
Source: Morningstar Note: Data as of May 14, 2009
Croft Value CLVFX 14.6 -42.9 -25.8
Dodge & Cox stock ticker DODGX 13.4 -43.3 -10.5
Hartford Capital Appreciation ITHAX 18.4 -46.1 -22.9
Hodges HDPMX 12.4 -49.5 -26.3
Janus Overseas JAOSX 26.4 -52.8 -23.9
Marsico 21st Century MXXIX 11.5 -45.2 -10.5
Vanguard Windsor VWNDX 14.0 -41.1 -22.3
Vanguard S&P 500

8.8 -37.0 -22.2

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