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My 2004 mutual fund hits and misses
In 2004, 15 of the 23 mutual funds I put before you actually paid off. The Bruce Fund, which I liked, has done very well. But so did Vanguard Pacific Stock, which I didn't like.
By Timothy Middleton
Each year at this time I report on how the funds Ive recommended during the year have performed. Last year, aided by an ebullient market, I had great success. This year, with the market extraordinarily volatile -- and therefore no tailwind to take advantage of -- I didnt do as well.
Ive looked back at 23 of the ideas I put before you, the best as well as the worst. The result is 15 ideas that worked out and eight that didnt. None actually went into a black hole, but they disappointed for one reason or another. In two cases, funds I disparaged did quite well.
I still dont like them, but they defied me.
Ordinarily, on the theory that bad news draws more eyes than good news, I would detail my failures first. But Im going to make an exception for what turned out to be the most successful fund I profiled.
Bruce Fund: made for this market
It's Bruce Fund (BRUFX), which just got a ticker symbol this month as its assets have topped $30 million, from $11 million in May, when I wrote about it.
Bruce Fund was ahead 19% at the time. By Dec. 17 that performance had surged to golden-goose proportions, a gain of 52.7%. The father-son team of Robert and Jeff Bruce were made for todays market. Their cautious and contrary approach did miserably in the roaring '90s, but over the last five years their annualized gains exceed 33%.
This year theyve hit home run after home run. One example: The Bruces invest about half in equities and half in debt securities, including convertible bonds. In January, one of their top positions was a so-called busted convert -- bonds of a failing Internet telephony company called Ibasis (IBAS, news, msgs). The convertibility option was worthless because the stock price had fallen far below the option price, and the 5.75% bonds were trading for 60 cents on the dollar.
But Internet telephony is suddenly the new "new thing." The debt was restructured into bonds yielding 6.75%, and the conversion price was slashed to $1.85 a share. With the stock now trading around $2.40, and thus the convertibility option in the money, the bonds surged to a price of $1.27 as of Sept. 30, the date of the funds most recent SEC filing.
My mistakes
Now to my missteps:
On May 25, my column identified seven funds I thought nobody should own, for reasons I explained at the time. I was largely correct, but two of them finished in the top performance quartile for the year.
Heres how they've done year-to-date as of Dec. 17, along with their category rank in Morningstar, where 1 is best and 100 is worst:
| How have the 7 funds no one should own performed? | | Fund | Return | Morningstar rank | | AIM Global Health Care B (GTHBX) | 5.9% | 58 | | CGM Mutual (LOMMX) | 9.3% | 20 | | Gabelli Global Growth (GICPX) | 6.7% | 89 | | MainStay Convertible B (MCSVX) | 3.7% | 98 | | One Group Ultra Short-Term Bond C (OGUCX) | 1.4% | 32 | | Stratton Monthly Dividend REIT (STMDX) | 23.4% | 98 | | Vanguard Pacific Stock Index (VPACX) | 13.2% | 13 |
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Five remained duds, but two didnt -- Vanguard Pacific Stock Index (VPACX) and CGM Mutual (LOMMX). (While the Stratton fund's performance was much better than the stock market, it did worse than 97% of other real estate funds.)
The Vanguard fund has a poor long-term record because its basically indexed to Japan, which has suffered through a miserable 15 years of failed economic policies. This year, when it seemed Japan might revive, the fund briefly flowered.
But Japanese growth is slowing again. The Japanese arent ready yet to cut their losses and face up to a new global future. I still dont like this fund.
Nor do I like CGM Mutual, which as recently as a week ago was performing poorly. This extreme volatility, combined with the funds poor long-term record, continue to make it a loser in my book, but its top-20% ranking in its category leaves egg on my face.
Two obscure funds disappoint
While Bruce Fund turned out to be an undiscovered gem, two other obscure funds I touted in February and March were disappointing. IMS Capital Value (IMSCX), which had put up eye-popping three-year numbers after changing its strategy to put more emphasis on price momentum, went into a swoon over the summer. It has managed a 5% gain since I mentioned it in late February, the same as the market.
On March 16, I fawned over another undiscovered fund called Auxier Focus (AUXFX), which had nailed a fabulous three-year record. Alas, it lost steam this year, climbing about 8.7%, roughly a third of a percentage point less than the market since my recommendation.
In one of my first columns of the New Year, I suggested that foreign bonds would prosper amid a weakening dollar and generally higher interest rates overseas. The fund I recommended was Loomis Sayles Bond (LSBDX), which offers unhedged exposure to high-quality foreign bonds.
My timing was awful: The fund promptly tanked, losing 8% of its value by mid-May. Fortunately, it recovered, and as of Dec. 17 was ahead 11.7% for the year. On a full-year basis, the fund continues to perform in the top 10% of its category.
You win some, you lose some
Two weeks later I predicted the market could move mostly sideways during the year, making market-neutral funds attractive. Specifically, I talked about Merger Fund (MERFX), which bets on corporate takeovers. I was right and wrong. If you'd bought the fund the day the column appeared, you would've avoided losing as much as 8%, as the market did through August. But you would've finished the year unchanged. On a full-year basis, the fund eked out a gain of 1.9%, trailing the market by more than 7 percentage points.
Sometimes I had bad ideas as well as good in the same column. My first column this year concerned the Bridgeway family of funds, which were among those I described as clean funds after last years fund scandals. I paid particular attention to two funds, Bridgeway Blue-Chip 35 Index (BRLIX) and Bridgeway Aggressive Investors 2 (BRAIX).
The second of these funds did admirably this year, surging 14.8%. But the unusual index fund was a bust, struggling to return just 3.2%.
In another case of mixed news, in April I profiled seven funds that had distinguished themselves in bull and bear markets. They made up a good list, and several were subsequently flooded with assets and closed to new investors, including FPA Capital (FPPTX), up 11.5% so far this year, and Dodge & Cox Balanced (DODBX), up 12%. Royce Total Return (RYTRX), which remains open, shot up 15.8%.
But one of those seven, Clipper Fund (CFIMX), stumbled badly, managing to return just 3.8%. Part of the problem was manager Jim Gipson stubbornly holding onto 25% of his assets in cash. But thats no excuse: FPAs Bob Rodriguez had even more, 33%, but excelled nonetheless.
A sound performance
In the success column, I include Cullen Value Fund (CVFCX), which had only $35 million of assets when I wrote about it in June and was then down 1.2%. Assets have since risen to $44 million, thanks in part to stellar performance in the year's second half. It finished up 11.6%, beating the market by about 2.5 percentage points.
In July, I profiled Keeley Small Cap Value (KSCVX). It has all the things I like in a fund, including heavy insider ownership (and aside from its front-end load of 4.5%). At the time, it was up 9.7%, but shareholders did even better after that -- the fund recently was up 29.6% for the year.
In August, I touted Hodges Fund (HDPMX), an eccentric portfolio that had shot up 80% in 2003 and was clinging to a slim 1% gain then. A major misstep was its Krispy Kreme Doughnuts (KKD, news, msgs) holding, but the fund finally admitted its mistake and sold the stock. The fund took off in the fourth quarter and recently was ahead 29.6%.
I brought Fidelity Select Leisure (FDLSX) to your attention in July as a great fund for kids to own, since it specializes in household names like Walt Disney (DIS, news, msgs), McDonalds (MCD, news, msgs) and Yahoo! (YHOO, news, msgs). It was ahead only 1.3% at the time, but really took off in the second half, climbing about 15.8%.
More recently, in October, I outlined a rationale for investing in technology during the fourth and first quarters. The portfolio I touted was SPDR Technology Sector (XLK, news, msgs). This was a timely call: Since that column appeared, this exchange-traded fund is up 11%, beating the market, which it had trailed all year, by three percentage points.
Mistakes are painful, but Ive learned you cant avoid them. The best portfolio is diversified well enough that the failures dont overwhelm the successes.
At the time of publication, Timothy Middleton owned the following securities mentioned in this article: SPDR Technology Sector.
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