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Mutual fund all-stars
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March 29, 2001: 7:46 a.m. ET
A few funds defy odds and win in both growth and value years
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - For a value investor, things got so rough back in the late '90s, says portfolio manager Robert Morris of Lord Abbett & Co., that it could be tough to keep confident when his stock-picking strategy was so often written off as passé.
"It was probably one of the most difficult times," said Morris, a 30-year industry veteran. "I thought, 'I'm making money, I think I'm doing my job,' but people weren't appreciating it. After a while, the criticism does sting."
But, as we all know – and some, more painfully than others -- value investors got their revenge last year. Morris, co-manager of the Lord Abbett Affiliated Fund, saw his large-cap value fund rack up a solid 15.2 percent gain last year on top of a 16.9 percent return in 1999. Those back-to-back annual results allowed him to join the rarified club of fund managers who posted positive returns in both the bull year of 1999 and the gloomy days of 2000.
In the late '90s, mutual fund investors became accustomed to reaping big returns on virtually any fund that invested in technology. But after last year's market meltdown, many funds stunned investors by posting hefty losses. While many investors now are licking their wounds, those who bought shares in a number of funds that defied the odds are humming right along.
 "Frankly, we haven't seen an environment as extreme as we saw in 1999 and the first part of 2000 for some time," Morris said. "We have gone through quite an usual period, so hopefully our experience is reflective of the fact that we can perform in years in which our style is clearly not in vogue, and in years when it is in vogue."
The 1999 and 2000 all-star funds include an array of different types of investments, including value funds such as the Affiliated Fund – which look for shares of undervalued companies and then sell them when the stocks go up – as well as some municipal and high-yield bond funds, energy funds, real estate funds, international stock funds and so-called hybrid funds, which own both stocks and bonds.
 Even a handful of growth funds, which climbed mightily in 1999, were able to follow up on their success in 2000. These two-time winners capitalized on good timing in sectors such as health and technology where other funds miscalculated. Others boosted their cash holdings when market conditions got dicey, helping stabilize their portfolios.
"I really think that it's a little bit of a quirk that a lot of funds were able to do well," said Scott Cooley, an analyst at fund tracker Morningstar Inc. He said that many successful equity funds held a lot of technology shares in 1999 and then sold those stocks in 2000 before the Nasdaq began to implode.
"Unfortunately, I can think of more that did the other – who were light on tech in '99 and loaded up in 2000," he said. "That was certainly a rotten call."
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I really think that it's a little bit of a quirk that a lot of funds were able to do well.
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Scott Cooley
Mutual fund analyst
Morningstar |
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A common denominator for many all-star funds was strategic investments in health care, Cooley noted. Biotechnology stocks were on fire in late 1999 and early 2000, but then fell back sharply. Some savvy investors, he said, then shifted into large-cap pharmaceutical stocks, which benefited from the volatility gripping the rest of the market.
The Smith Barney Aggressive Growth Fund, for instance, jumped 63.7 percent in 1999 and followed it up with a 19.2 percent gain last year. Morningstar notes that the fund, run by portfolio manager Richard Freeman, was boosted by big investments in drug maker Forest Laboratories (FRX: Research, Estimates), maker of the fast-selling antidepressant Celexa, and Alza Corp. (AZA: Research, Estimates), which makes drugs to treat cancer and other diseases. Shares of Forest surged 116 percent last year, while Alza stock rocketed 145 percent.
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The surge in health-care stocks made pure-play medical funds the best performing fund sector last year. For the two-year span, the Munder Framlington Healthcare Fund was one of the standouts, gaining 38.7 percent in 1999 and another 86.4 percent in 2000.
Amid last year's market turmoil, value investing across the spectrum proved to be a solid strategy for many funds. Among the value funds that had two banner years in a row were Dreyfus Midcap Value fund, which rose 28.1 percent in 1999 and another 27.5 percent last year, and Royce Low-Priced Stock fund, with a 29.8 percent annual return in 1999 and a 24 percent return last year.
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A number of international funds also managed to come out on top in both years. Oppenheimer Global stock fund surged 58.5 percent in 1999, and managed to eke out a 4.1 percent return in 2000 – a year when many other overseas funds floundered. Mutual European equity fund rose 46.1 percent in 1999 and another 14.1 percent last year.
However, Morningstar's Cooley cautions investors not to rush right out and buy the funds that managed to buck the odds recent years. In fact, the topsy-turvy market of 2001 already has taken a toll on some of the winners of 1999 and 2000. If nothing else, Cooley says, the recent turmoil on Wall Street should have taught investors that nothing is certain in life – let alone in mutual funds.
"The last couple years should have humbled just about anyone who thought they could predict what is going to happen in the market," he said. "I think the lesson that investors should be taking is, 'shouldn't my portfolio be diversified?'" 
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