Mutual Fund 'Mutts' Pounded in '08

The second set of results from the experimental "mutts of the funds" strategy are in. Unlike the 2007 mutts, which modestly outperformed the market, the 2008 mutts were pounded in line with the overall market.

This contrarian theory, extrapolated from the Dogs of the Dow investment strategy, argues that, on a macro level, funds that had previously performed well but posted a bad year are likely to bounce back the following year.

In 2008 -- the worst year for stocks since the Great Depression as the S&P 500 sank 37% and the Nasdaq Composite dove nearly 40% -- the 2008 mutts averaged a comparable loss of 37.95%. While 11 of the 23 funds performed better than the S&P 500; 12 did worse than the benchmark.

Last year's column about the mutts -- These Rebound Funds Could Add Bounce to Your Portfolio -- warned that "there is no guarantee of the 'mutts of the funds' strategy paying off in 2008." This warning still applies since, with this or any other fund strategy, you can lose money.

The article also cautioned that "if we do have a recession in 2008, all bets are off, and the bear may rule Wall Street." The National Bureau of Economic Research last month declared the U.S. economy peaked in December 2007, shifting from a period of expansion to recession.

So, on to the results, and a look at the 2009 mutt funds.

Winning Best of Show of the 2008 mutts, having recorded the least ugly loss, the Burnham Financial Services Fund (BURKX Quote) slipped just 14.78% last year. The fund's largest stock holding, TFS Financial (TFSL Quote), gained 9.80% in 2008, offsetting some of the damage from decliner such as the 75.98% loss by Citigroup (C Quote) and 25.13% decline in JPMorgan Chase (JPM Quote).

2008 Mutts Pounded in Overall Market Decline Fund Ticker Total Return 2008 Cohen & Steers Realty Shares Inc CSRSX -34.40% DWS Small Cap Value Fund* SCSUX -36.61% Wells S&P REIT Index Fund WDJAX -38.26% MainStay Small Cap Opportunity Fund MOPIX -36.51% Schneider Small Cap Value Fund SCMVX -46.53% Hotchkis and Wiley Mid-Cap Value Fund HWMIX -43.05% RiverSource Real Estate Fund ARLAX -39.39% Vanguard REIT Index Fund VGSIX -37.05% American Century Real Estate Fund REACX -43.26% ING Large Cap Value Fund* IVLIX -50.75% Goldman Sachs Structured Small Cap Equity Fund GCSAX -35.17% HighMark Small Cap Value Fund HMSCX -31.60% JP Morgan Realty Income Fund URTLX -42.24% Oakmark Select Fund OAKLX -36.22% Legg Mason US Small-Capitalization Value Trust LMSVX -31.06% Wells Fargo Advantage Small Company Value Fund SCVAX -39.60% Burnham Financial Services Fund BURKX -14.78% Allegiant Multi-Factor Small Cap Value Fund AMRIX -29.36% Putnam Small Cap Value Fund PSLAX -39.48% Lotsoff Capital Management Micro Cap Fund LCMMX -46.99% Legg Mason Partners All Cap Growth and Value Fund SPBLX -51.48% Sterling Capital Small Cap Value Fund SPSCX -32.63% Old Mutual Barrow Hanley Value Fund OAFOX -36.54% * Approximated return of acquired fund Source: Bloomberg

Please note that DWS Small Cap Value Fund (SCSUX) was acquired by DWS Dreman Mid Cap Value Fund (MIDTX Quote). Also, the ING Large Cap Value Fund (IVLIX) was acquired by ING Global Real Estate Fund (IGLIX Quote). Combined approximations of full-year returns are shown in the above table.

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