With 2008 shaping up to be a year with at least as much market uncertainty as 2007, several trends from last year may offer advisors and investors a taste of what’s ahead. First, according to Lipper, are the top-ranking funds of last year: They include funds that emphasize commodity, Latin America and Asia holdings. In addition, the top-ranking fund managers, as judged by Morningstar, include those who placed the right technology and global bets.
Overall, reports Lipper, world equity funds “remained king of the hill” by outshining U.S. domestic equity funds and sector equity funds. In the fourth quarter, just 22 percent of all equity funds posted positive returns. Natural-resource funds jumped “to the head of the classifications for the first time since first quarter 2005,” with fourth quarter returns of about 7 percent, says Lipper. Large-cap and growth-oriented funds were the strong performers of 2007 compared with their small- and value-oriented counterparts, Lipper adds. Mid-cap growth funds, though, rose about 16.5 percent during the past 12 months.
China and Latin American funds respectively averaged upswings of 55 percent and 46 percent in 2007 — topping the 6.43 percent gain for the Dow Jones, the 9.8 percent increase in the Nasdaq, the 3.5 percent uptick in the S&P 500 and the 11 percent improvement in the MSCI EAFE Index.
Boston-based Direxion Funds aims to build on the ’07 momentum of its leveraged-index commodity and Latin America funds, which top Lipper’s performance list. Direxion has recently introduced three new international leveraged-index funds that offer investors a bullish or bearish take on the FTSE/Xinhua China 25 Index, as well as a bearish bet on the S&P Latin America 40 Index.
This brings the total number of Direxion funds to 27. The funds are sold via the Fidelity, Schwab, Pershing, TD Ameritrade and LPL platforms and are primarily geared to advisors, the company says. “Direxion’s funds are designed to complement, not replace, core investment holdings,” says Dan O’Neal, the group’s chief investment officer.
Direxion, formerly Potomac Funds, is managed by Rafferty Asset Management. It has some $1.5 billion in assets under management.
CGM Focus, ranked third in the Lipper listings (excluding ETFs) is given a five-star rating by Morningstar, which says the large-cap blend fund has some $5.5 billion in assets and a 1.02 percent expense ratio. Its five-year average trailing returns are close to 36 percent, and it outperformed other funds in its category last year by nearly 74 percent.
The fund is managed by Capital Growth Management of Boston. According to its June 30, 2007, prospectus, CGM Focus sold several financial holdings short while retaining investments in Embraer, Petrobras, Rio Tinto, Potash Corporation, Fluor, Hansen Natural and Research in Motion.
AIM Investment’s China fund, fourth on the Lipper list, has assets of some $450 million, says Morningstar, and an expense ratio of 2.09 percent. Some of its major holdings are China Mobile, PetroChina, China Life Insurance, China Petroleum and Chemical, China Construction, China Coal Energy, Air China and Cosco International.
Coming in as the fifth-best Lipper fund performer, Nationwide China Opportunities also gets a five-star rating from Morningstar, which says the fund has some $119 million in assets and expenses of 1.99 percent. This fund rose 26 percent more than other funds in its category, with top holdings that overlap some of the companies in AIM China.
The No. 6 Matthews Asian China Fund, launched in February 1998, now has about $2.4 billion in assets. Its expense ratio is 1.26 percent, the company says, and its turnover in 2006 was under 15 percent. Among its 64 holdings are China Mobile, China National Building Materials, Dongfeng Motor Group, China Shenhua Energy and Ping An Insurance.
The Matthews Asian India Fund, the ninth best-performing fund on Lipper’s list, has some $1.1 billion in assets. It was launched in October 2005 and now has 56 holdings with a 1.41 percent expense ratio. Matthews says some recent holdings in this fund are consumer-products maker Dabur India, HDFC Bank, Infosys Technologies, Axis Band, Sun Pharmaceutical Industries, Glenmark Pharmaceuticals, vehicle producer Ashok Leyland and industrial conglomerate Reliance Industries.
While Asian-focused funds dominate the Lipper ’07 leading fund list, energy and natural resource funds hold several of the top slots in Morningstar’s domestic ’07 fund list. CGM Focus comes out on top of the Morningstar listing, as well as being a high-ranking Lipper fund. Ken Heebner is the portfolio manager of CGM Focus and has led the fund’s investment management since its inception in ’97.
Topping Morningstar’s fund manager of ’07 awards list is Will Danoff of the five-star Fidelity Contrafund (since 1990) and Fidelity Advisor New Insights (since 2003), which have a combined $90 billion in assets.
“Contrafund and Advisor New Insights both posted tremendous gains in 2007 and have done so over the long haul as well,” Morningstar reports. “Over the past 10 years, Contrafund has returned an annualized 10.9 percent versus 6.2 percent for the S&P 500. Over the past three years, Advisor New Insights has returned an annualized 16.9 percent vs. 8.8 percent for the S&P 500. Bets on Google, Berkshire Hathaway, and Apple have proved to be winners; Danoff bought Google at its IPO, Berkshire in 1999, and Apple in 2003.”
In presenting the Fidelity manager with the honor, Morningstar’s director of fund analysis Christine Benz explains, “Will Danoff has shown that managing a huge pool of assets doesn’t prevent managers from making smart and timely investing decisions. His style is hard to pin down, but he is consistently able to sniff out trends before other managers and find ways to stay ahead of the market.”
The Contrafund also includes holdings in Hewlett-Packard and ExxonMobil. It rose some 20 percent in 2007 and has a five-year trailing 12 month return of 17.35 percent on average.
International stock fund manager Hakan Castegren launched the now $27 billion Harbor International Fund in 1987. The fund rose 21.8 percent last year and had a five-year trailing12-month average increase of 25.99 percent.
Some major holdings are ABB of Switzerland, BHP Billiton of the United Kingdom and Brazil’s Petrobras. According to Morningstar, the fund’s yearly turnover of assets is about 13 percent. As of September 30, 2007, financial-service holdings represented 27 percent of the portfolio, industrial goods 27 percent and consumer goods 15 percent.
“Hakan Castegren has been at the helm longer than any other foreign large-value manager, and is the third longest-serving foreign large-cap manager overall,” Benz says. “Analysts Jim LaTorre, Howard Appleby, Jean-Francois Ducrest, and Ted Wendell are also seasoned hands. We’re fans of their disciplined — but not rigid — approach to stock-picking. Castegren also has a lot of skin in the game, with more than $1 million of his own money invested in the fund. His talents also led us to name him International-Stock Fund Manager of the Year in 1996.”
In fixed-income, Bill Gross of Pimco picked up his third Morningstar honor, after winning in the category in 1998 and 2000.
“In mid-2006, Pimco and Gross anticipated that weakness in home prices would have enormous impact on corporate bonds and the economy overall, and Pimco began cutting its exposure to U.S. corporate bonds. While its prediction didn’t come true until mid-2007 (causing the fund to trail its peers for the second half of 2006), Pimco and Gross’ prescience mean the fund now tops most of its intermediate-bond counterparts,” explains Morningstar.
“Bill Gross is a legendary manager who doesn’t hesitate to act with conviction and differ from consensus when he believes it will benefit fundholders,” Benz shares. “Pimco Total Return has a great long-term record, and Pimco and Gross’ predictions about subprime and the weakness in the economy proved to be right on target in 2007. Gross has a significant personal investment in the fund, and overall, he’s one of the most talented investors today. It’s no surprise that he is our first three-time fund manager of the year.”
Janet Levaux is the managing editor of Research; reach her at firstname.lastname@example.org.