In most cases, there is nothing to worry about. For example, many of the best managers stick to fairly strict, inflexible strategies that they consider most likely to yield long-range success, and they don't waver when that style isn't in vogue. When their type of holding falls out of favor, there's little chance such funds will keep up.
Other common victims are concentrated funds. With a lot riding on a small number of stocks, setbacks in just two or three of them can send the fund's returns to the bottom of the short-term charts. Yet, talented investors can overcome such reversals to shine in a concentrated format over the long term.
Below are three funds that we have considered some of the most appealing in their fields but that are scraping the bottom ranks of their respective categories with about six weeks left in 2010. The good news is that in all of these cases, there are no signs of significant problems, and they remain worthy of attention. Janus Twenty and Janus Forty
These funds are very similar, run by the same manager in the same style. In fact, they're practically identical; both have roughly 40 stocks in the portfolio. Manager Ron Sachs hasn't been at the helm for the long term here, having taken over from Scott Schoelzel at the beginning of 2008. But he was no neophyte. Before arriving at these funds, Sachs had run Janus Orion (now known as Janus Global Select
) with much success for 6.5 years. So, there was every reason to consider these offerings worthy contenders in the large-growth arena even after Schoelzel's departure.
It didn't work out so well in 2008, Sachs' first year at the helm. The funds lagged the large-growth average as the market cratered. But they roared back in 2009's rebound, landing in the top quartile. Stocks have risen again this year--but this time the funds haven't capitalized nearly as well as most of their peers. In fact, they're sitting in the bottom 10% of the category for the year to date through Nov. 18, trailing the group average by more than 5 percentage points.
What gives? There are two culprits in particular. Sachs owns more of the biggest stocks around, with far fewer mid-caps than rival large-growth funds. Mid-caps and "smaller large caps" have outperformed the giants this year by substantial margins. Moreover, Sachs has a much bigger stake in financials than most other funds in the group, and that sector has struggled this year. Many of the financial holdings in the Janus portfolios are down heavily this year, with a 22% loss from Bank of America
, one of the portfolios' largest stakes, taking a toll. Moreover, an even larger position outside of the financials sector-- Cisco Systems
, which stood at more than 6% of each portfolio for much of the year and still took up nearly 5% of assets on Sept. 30--has plunged 18% for the year to date.
Sachs has succeeded with this style for most of his career, though. He hasn't changed his stripes. And he hasn't lost his touch, either; he made the bold commitment to devote a huge percentage of assets to Apple
--it took up more than 9% of the portfolio entering the year and is now around 11%--and that has worked out spectacularly well as the stock has soared more than 45% in 2010. Big gains in Anheuser-Busch InBev
and United Parcel Service
show that, although a growth manager, he can succeed with choices outside the technology arena.
In short, this year's disappointing showing doesn't diminish the funds' appeal. But it does point out that both their style and their concentration do add risks that some investors may prefer not to deal with. Artisan Mid Cap Value
Here's a fund whose name alone tells you it is very different from the large-growth-oriented Janus pair. And the differences don't stop with Morningstar Style Box placement. While this fund has only 55 holdings, the assets are spread fairly evenly among them, so it is not as concentrated a strategy, either.
What it shares, though, are good managers with solid long-term credentials. Scott Satterwhite and James Kieffer have been at the helm since November 2001 (George Sertl was promoted from analyst to comanager in 2006), and over that nine-year stretch this fund has crushed the mid-value average, with an annualized return of 11.6% versus 6.4%. Less happily for its shareholders, however, this fund also resembles the Janus pair with its lousy ranking in 2010. Through Nov. 18, Artisan Mid Cap Value is lagging 88% of its mid-value rivals.
The explanation will be familiar to shareholders of many funds whose managers like to own companies with solid financial foundations and who tend to shun those in dicier situations. The latter type of stock outperformed those in this portfolio by quite a lot this year--particularly in the first quarter, the managers note. A sharp decline in L-3 Communications Holdings
has been a particular problem, as well. Given the history here and the fact that the strategy and management haven't changed, though, there's little reason for concern. Diamond Hill Large Cap
--a top-10 holding that's down 19% so far this year--big losers haven't been the issue for Diamond Hill Large Cap in 2010. Rather, the main problem has simply been a lack of meaningful winners. One has to go down to the 15th slot in the portfolio to find a stock that's posted a gain of greater than 10%, while ahead of it lie seven different stocks in the red. As a result, this fund lands in the 96th percentile of the large-value category for the year to date.
That's not a reason for panic. Lead manager Chuck Bath, who has been at the helm since 2001, remains in charge, and he's not changing course. As with the Artisan fund, a dislike of riskier fare has hurt here, relatively speaking, in 2010. More specifically, one can attribute this year's struggle to Bath's liking for two areas--health care and energy. There is a substantial overweighting in both sectors versus the large-value category average, and neither has been in the market's sweet spot this year, to put it mildly.
The longer-term performance here during Bath's tenure, though, has been impressive. This, too, is a fund that should reward shareholders willing to stick with it at a time when it is admittedly difficult to do so.