Standard & Poor’s and Morningstar analysts made their 2011 mutual fund winners and losers picks in late December after examining the overall fund universe as well as individual fund performance within it. Not surprisingly, there were some surprises.
For example, portfolios that were heavily weighted with emerging markets stocks suffered some of the largest losses, despite all the positive talk around emerging nations such as China, India and Brazil. In contrast, a highly concentrated fund with just 22 holdings and no new stocks purchased in the last 75 years was a top performer.
First, the mutual fund winners, as selected by S&P Capital IQ’s mutual fund analysts using their MarketScope Advisor screening tool. All three fund picks have a five-star ranking from S&P Capital IQ.
They earned this top ranking for their relatively strong, risk-adjusted track records, long management tenures, low costs and recent ownership of stocks considered to be undervalued:
ING Corporate Leaders Trust Fund (LEXCX)
Sequoia Fund (SEQUX)
SunAmerica Focused Dividend Strategy Portfolio; A (FDSAX)
“S&P Capital IQ has star coverage of over 4,600 domestic equity and global equity mutual funds, excluding those targeted only for institutional investors,” wrote S&P Capital IQ Mutual Fund Analyst Todd Rosenbluth in a note. “As we review the best performing funds thus far in 2011, we find that just 693 of them (15%) have a total return greater than 2.7%, and an even smaller number of those, 167, currently have a five-star ranking.”
The Sequoia Fund, up 13.6% this year, received the S&P Capital IQ Mutual Fund Excellence Gold Award earlier this year for the consistency of its top ranking in the one-year period ended August 2011. “With management's long-term investment strategy, evidenced by its below-average 23% turnover rate, little has likely changed since then,” Rosenbluth said. The fund has relatively high exposure to health care stocks, including Valeant Pharmaceuticals, which is a strong buy, “and we think its 20%-plus cash equivalent stake has limited the fund's volatility.”
ING Corporate Leaders Trust Fund, up 12.5% year to date, is on pace to be the top-performing domestic large-cap value fund in S&P Capital IQ’s universe for the second straight year, after rising 21.2% in 2010. Recent top 10 holdings include Exxon Mobil, Honeywell and Praxair. “However,” Rosenbluth warns, “investors should be cognizant that the fund is highly concentrated, with just 22 holdings, as no new stocks have been purchased in this passively managed trust since its formation more than 75 years ago.”
SunAmerica Focused Dividend Strategy Portfolio, up 12.4%, is a multi-cap core fund “that could easily have been missed in late 2010, based on its below-average performance that year,” according to Rosenbluth. However, he said, the fund's three- and five-year record under current management has been relatively strong, its Sharpe ratio is above average, its expense ratio is just 0.95% and its dividend focus benefited in 2011 as investors sought out yield in the face of market volatility.
And now for the losers, as selected by Morningstar’s Premium Fund Screener in an examination of mutual funds with $5 billion or more in assets and losses at 15% or greater during the past year.
Janus Overseas (JNOSX)
Vanguard Emerging Markets Stock (VEIEX)
“Given the recent travails of foreign markets, foreign-stock funds of all types dominate the list, with emerging-markets-heavy portfolios incurring some of the largest losses,” wrote Christine Benz, Morningstar’s director of personal finance. “Of the $5 billion-plus club, Janus Overseas was the biggest loser by a mile. Yet a small smattering of domestic-stock funds also made our laggard list.”
Fairholme's Bruce Berkowitz “had a bad year of nearly epic proportions in 2011,” according to Benz. This disappointment came after he generated a nearly unbroken string of top-quartile results from 2000 through 2010 and won Morningstar's Fund Manager of the decade. “Most of the stocks in this financials-heavy portfolio have suffered losses ranging from bad to horrible, and Berkowitz has had to spend down his once-robust cash cushion to pay off departing shareholders,” Benz wrote.
Janus Overseas’ many risks came home to roost in 2011, Benz said. “Its above-average emerging-markets stake and emphasis on smaller stocks were painful in a market environment that favored blue chips from developed markets. Even the fund's U.S. holdings–which might have helped hold performance aloft–are struggling turnaround plays such as Delta Airlines and Ford.”
The Vanguard Emerging Markets Stock index fund's painful results “illustrate that investors in pure emerging-markets funds have had nowhere to hide,” Benz wrote. “As Morningstar senior analyst Gregg Wolper notes in his recent report, China has suffered from worries over slowing growth and rising inflation, while the Brazilian market has struggled owing to growth worries as well as the ushering in of a new government. The performance downturn has no doubt been a cold bucket of water for new investors lured by the emerging-markets growth story as well as very strong returns in 2009 and 2010.”
What’s the lesson for investors from these winners and losers?
“For many U.S. mutual funds, 2011 will be a forgettable year, as they either treaded water or lost ground compared to a broader benchmark. But we think the lesson for investors should be to not necessarily chase the prior year's winning funds,” S&P Capital IQ's Rosenbluth said. “Rather, they should try to understand the investment strategy and determine if the fund's sector and stock exposure is consistent with their preferred asset allocation needs.”