Mutual Fund Turnarounds: This Year’s Crop

by George Putnam, III
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Submitted by George Putnam, III as part of our contributors program.

In addition to advising against market timing, I always strongly recommend diversification as the best way for investors to reduce risk. For that reason, I believe that mutual funds are very appropriate for many investors because they provide ready-made diversification. However, given my contrarian bent, I don’t like just any mutual funds; rather I like funds that either focus on turnaround investing as part of their strategy or are themselves something of a turnaround. This latter category usually means funds with good long-term track records that have stumbled for a year or two.

Last year around this time, I looked at nine funds that fit in this rebound category. They had underperformed significantly in 2011 despite strong long-term records. As a group, they definitely lived up to my expectation that they would turn around: the average return (net of fees) for the nine funds for 2012 was just shy of 20%, almost four percentage points better than the S&P 500.

The stock market was less volatile in 2012 than it was in 2011, but nonetheless a number of funds with good long-term records stumbled last year. I’ve highlighted several of them below that I expect to revert to their winning ways before long.

Calamos Growth (CGRRX) is the only holdover from last year’s list, as it underperformed again in 2012. We’re including it again because of its experienced management team and good long-term record. Also, I like the fund’s focus on consumers in emerging markets, aging populations in developed markets and technology to enhance productivity. I expect a return to outperformance.

Marsico Growth (MGRIX) is overseen by Tom Marsico who achieved near-legendary status as a growth stock manager while at the Janus funds in the 1990’s. He left Janus in 1997 to launch his own firm, Marsico Capital. Since inception, Marsico Growth has roughly doubled the performance of the S&P 500, but the fund has underperformed the S&P for both of the past two years. Nonetheless, I expect Marsico to regain his touch.

Nuveen Tradewinds Value Opportunities (NVOAX) seeks special opportunities with an emphasis on value investing. With a measly 2.05% return in 2012, the fund was obviously not a good performer; it was particularly hurt by its exposure to mining and coal stocks. The fund has performed well since inception in 2004, however, and I expect it will rebound. I like its current exposure to AIG and GM as well as the energy sector.

Pioneer Fundamental Value (CVFCX) fund began in 2000, but the management company’s roots date back to 1928. Ill-timed bets on European companies dragged down performance last year, but its ten-year record remains strong. I think the fund’s exposure to banking and financial services and the pharmaceutical industry could power a rebound.

Royce Low-Priced Stock (RYLPX) fund invests in low-priced equities, mostly in the U.S., but the fund can also look overseas. The fund has performed well since inception in 1993, but has lagged recently. Royce Low-Priced’s underperformance in 2012 followed an even more disappointing 2011. I expect the fund to revert to its more typical strong performance before long.

Yacktman Fund (YACKX) is overseen by Donald Yacktman, who has established an enviable long-term record as a value investor. While Yacktman’s 2012 performance lagged the overall market, his time horizon is more like ten years than one year. I agree with that approach.

Virtus Mid-Cap Value (FMIVX) fund originated in 1997 and continues to be managed by Sasco Capital, a sub-advisor specializing in contrarian/value investments. The fund seeks undervalued, diversified companies that have been dragged down by an underperforming division. Poor stock picking in consumer discretionary stocks held back the fund’s performance in 2012. Materials and industrial stocks account for a majority of holdings, and so broad-based economic growth would bolster the fund’s returns in coming quarters.

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