“The last six months we’ve been trying to figure out which managers just hit a bad patch last year and which managers have just gone bad,” says Bold.

Spotting the difference between a temporary lull in performance and a more serious setback is a tough task for investors like Bold. Even the industry’s best managers inevitably have a down year or two when the stock tickers they own fall out of favor with the broad market. Many investors stick by these pros in the hopes they will regain their momentum. However, not all managers can stage such a recovery. The industry is littered with top-tier funds that fell into the basement of their categories and stayed there — for years.

This week SmartMoney’s fund screen tries to handicap which offerings are actually back on track. We started with a universe of 1,685 equity funds that had above-average 10-year track records. We then narrowed that group to 344 by looking for funds that were in the bottom 40% of their respective categories during the three-year time period. In addition, the funds had to beat the year-to-date performance of the S&P 500. Finally, we favored funds with proven managers, ones that featured stock ticker portfolios poised for growth and we made sure each offering did well coming out of the last bear market. Below are 10 funds we think could be on the comeback trail.

Of course, there is no guarantee that any of the funds will regain its former glory. Indeed, some funds in the table below, like Dodge & Cox stock ticker (DODGX) and Oakmark Select (OAKLX), made this screen the last time around in December, but have yet to stage the comeback we anticipated. By using the criteria mentioned above, however, we are aiming to increase our chances of sticking by a potential winner instead of selling at the wrong time. Two funds we previously wrote about that did stage comebacks are Al Frank (VALUX) and Wasatch Small Cap Growth (WAAEX). Both fell off the list this time due to good returns.

Investors should be wary about focusing on past returns. Three- and five-year returns, for example, can easily be skewed by an up or down year. Last year’s downturn was so severe that it even impacted the trailing 10-year returns of some funds. It may be more revealing to study individual 12-month spans. In his analysis, Bold treats 2008 almost as an anomaly since he thinks good managers got whacked when hedge-fund-type outfits were forced to sell stock tickers.

“What we had last year was a liquidity problem,” says Bold, who places more emphasis on how funds did after the 2001-02 bear market. “What [sophisticated investors] wanted to sell was their CDOs [collateralized debt obligations] to meet margin calls. But they couldn’t, so they sold whatever was the most liquid. The best stock tickers had liquidity.”

Ultimately, says Bold, investors need to weigh a poor performance against any emotional attachment they may have to a fund and its manager.

“When you have a manager who has done a great job for a long period of time you can give him the benefit of the doubt for longer than a manager who has [a spotty track record],” says Bold. “But ultimately you can’t fall in love with anybody.”

The Criteria: The no-load, equity funds on our list are in the top 40% of their Lipper categories over the trailing 10-year period and in the bottom 40% during the trailing three-year period. The funds are up at least 10% in 2009. We also added in some subjective criteria: The funds must have done well vs. the S&P 500 coming out of the last bear market and they must be run by companies or managers respected by advisors we talk to throughout the year. The funds are open to new money, require a minimum under $5,000 and charge an annual expense ratio under 1.5%.

Fund Type = *
Annualized 3-Year Return (%) = Display Only
Rank in Classification (%) (3 year performance) >=60
Annualized 10-Year Return (%) = Display Only
Rank in Classification (%) (10 year performance) <= 40
Expense Ratio <= 1.5%
Load Fund (type) = No Load
Minimum Initial Investment <= $5,000
Open to New Investors = Yes
Total Net Assets ($ millions) >= 50
Year-to-Date Return (%) >= 10
* Screen does not include fixed income offerings. The final list was generated by favoring funds with managers recommended by advisors throughout the course of the year. Performance during the last bear market was also considered.

SMARTMONEY ® Layout and look and feel of SmartMoney.com are trademarks of SmartMoney, a joint venture between Dow Jones & Company, Inc. and Hearst SM Partnership. © 1995 – 2009 SmartMoney. All Rights Reserved.

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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.

SMARTMONEY ® Layout and look and feel of SmartMoney.com are trademarks of SmartMoney, a joint venture between Dow Jones & Company, Inc. and Hearst SM Partnership. © 1995 – 2009 SmartMoney. All Rights Reserved.

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