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They are
the stars in one of the toughest periods in stock market
history — the seven mutual funds that made the most
money for investors between the end of the 2000-02 bear
market and what is hoped to be the end of the most
recent bear market,
March 9
.
But does
that mean you should buy them?
Not
necessarily. Though investors would have been pleased
with the returns from top funds in
Morningstar's
list of performance over that span, not all would have
provided a pleasant ride during the cycle's recent
torture. And that provides valuable insight into lists:
While helpful in denoting potential, lists of fund
winners often can be deceiving.
Take the
CGM Focus fund
. It was truly a standout in the last market cycle —
from
Oct. 4, 2002
, to
March 9, 2009
. But that provided no solace for investors.
CGM ended
on top of the list not because of a steady upward ride,
but largely because of the tremendous returns it
provided investors in 2005 and 2007. In 2007, the fund's
return of 80 percent was so outstanding it allowed the
fund to drop 48 percent while the stock market dropped
38 percent in 2008 and still top the list.
"It's
pretty amazing that a fund could lose 48 percent and
still end up at the top," said
Ryan Leggio
, a
Morningstar
analyst.
And he
does not think most investors reaped the benefits.
"Shareholders bail out during extremes," he
said. That's especially true if they come to a fund
expecting results such as CGM's return in 2007.
Still,
for those with courage, CGM could be a fine choice if it
continues to do what it has. Not only did it outperform
all other funds in the last market cycle, but it also
did the same in the previous cycle — from
Sept. 1, 2000
, to
Oct. 12, 2007
.
Focusing
on a complete market cycle gives investors a long period
in which to analyze a fund, Leggio said. It allows
investors to see how the fund maneuvered as the market
recovered from one bear market and ran into another.
When
picking mutual funds, performance in a few months or
even a year is unreliable. "Looking at a full
market cycle, and preferably several full market cycles,
can give an investor an idea of how a fund behaves in
rising and falling markets," Leggio said.
Few funds
hold up cycle after cycle, so a fund in the top third in
two cycles could be more significant than one in the top
10 for one cycle. Leggio points to Fairholme as an
outstanding fund that has been less volatile than CGM
and has been among the top 5 percent in the two most
recent market cycles. It was the second-best performer
between 2000 and 2007. And it repeated that performance
in the latest bear, ranking 21st out of 766 funds.
Another
superior fund is the Wasatch One Source Income Equity
fund, which ranked 12th in the recent cycle and 14th in
the previous one. Among the top seven in the most recent
cycle, Eaton Vance Dividend and Leuthold Select also did
well in the previous cycle, with
Eaton Vance
36th and Leuthold 41st.
That put
them well within the top third of all funds, a position
considered admirable. Also within that group are the two
Amana funds. The funds follow Islamic law, avoiding
companies with debt, a practice that kept them away from
banking disasters amid the financial crisis.
"If
a fund could promise to be in the top 30 percent in the
next cycle, you'd say: 'Give me that fund,'" Leggio
said.
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