From the January 2008 issue of Boomer Market Advisor • Subscribe!

Have you hugged your struggling fund today?

As a junior analyst covering Legg Mason Value more than a decade ago, I quizzed manager Bill Miller on his rationale for adding to his position in a company that had been badly beaten down. Miller's response was so common-sense and unequivocal that I can still recall it almost verbatim.

"I almost always do that," he replied. "If I liked a suit at Nordstrom when it was full price, I should like it when it's on sale, right?"

Doubling down -- upping the ante on a bet -- is a common tactic among value-minded mutual fund managers. If they've done their homework on a stock, these managers figure that lowering their funds' average purchase price of that name should be a no-brainer.

So, is doubling down a good idea when it comes to mutual fund holdings? It's certainly not foolproof. A performance slump in a fund can be an indication of fundamental ills, including personnel and strategy shifts, asset bloat, and upheaval at the fund-company level. And if the fund manager trades frequently or isn't particularly concerned about valuation, you won't get any sort of "pop" from buying the fund when it's in a trough because the slumping holdings may already be gone.

At other times, however, adding to funds on weakness can be an effective strategy. You can lower your clients' average cost basis, and you can give the manager money to put to work in the market when he or she is presumably finding a fair amount to buy.

Amid weakness in the housing and financial sectors, here are a few funds that appear to represent good buying opportunities. Not only do they have talented managers and good fundamentals, but their holdings look fairly cheap right now based on Morningstar's equity analysts' estimates of their holdings' fair values.

There are a few caveats, however. Some of these funds may make capital-gains distributions. Moreover, these funds won't necessarily outperform their peers or the market in the very near term. They are, however, superior long-term holdings and it's better to buy them when they're in a trough than when they're riding high on the performance charts.

Legg Mason Value -- This is shaping up as a year to forget for the world's most storied working mutual fund manager, and investors are demanding their money back. But no, we don't think Miller has lost his touch, and redemptions have also made the fund more nimble than it has been in the past few years. While Miller's portfolio contains names that few would consider cheap, such as Amazon.com and Google, it also contains a large share of names that appear to be trading cheaply, ranging from Tyco International to J.P. Morgan Chase.

Muhlenkamp Fund -- Manager Ron Muhlenkamp appears to be sticking with many of his unloved holdings, and we think investors would do well to stick with -- and even add to -- the fund on weakness. True, the fund's near-term returns look ugly, but we think Muhlenkamp is a talented investor, and the majority of his holdings, ranging from Citigroup to oil driller Nabors Industries look cheap based on Morningstar analysts' fair-value estimates.

Weitz Partners Value -- With a nearly 7 percent position in troubled lender Countrywide Financial at midyear, and 17 percent of assets devoted to housing-related names overall, this offering has been in the eye of the subprime storm. Even so, we think Weitz is a talented contrarian, and his portfolios are replete with stocks trading below (sometimes well below) Morningstar equity analysts' estimates of fair value.

Oakmark Select -- Struggling housing-related names, poor performance and shareholder redemptions. Are you picking up on some themes here? Although the specific names underpinning Oakmark Select's recent weakness differ from the ones ailing the aforementioned funds, the ramifications -- and our overall recommendation -- are quite similar. In fact, a recent analysis indicated that the portfolio had one of the highest average stock star ratings of any offering we cover.

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