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Mutual Fund 'Mutts' Pounded in '08

Kevin Baker

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) slipped just 14.78% last year. The fund's largest stock holding, TFS Financial (TFSL), gained 9.80% in 2008, offsetting some of the damage from decliner such as the 75.98% loss by Citigroup (C) and 25.13% decline in JPMorgan Chase (JPM).

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

Regardless of the sad "tail" of the 2008 mutts, with one positive result and one market-equivalent, negative result, the analysis of this bounce-back strategy continues.

In 2009, with the Federal Reserve now finished lowering interest rates, the incoming Obama administration is already on the ground in Washington, stumping Capitol Hill for a massive stimulus package of tax cuts and spending the likes of which have not been seen since the time of the Great Depression. The targets for "shovel ready" spending include long-live assets like bridges, roads and water systems. Hopefully this will be more effective than the temporary, economic blip from the stimulus checks.

The 23 mutts from 2008 were selected for having lost more than 12% in 2007 after having gained more than 12% in 2006. The same list for 2009 would be 364 funds long, so the members have been restricted to 2007 winners rising 12% or more that also lost 50% or more in 2008. Of these 18 new mutts, 16 of the funds target segments of the growth category and two focus on the technology sector.

The two funds falling the furthest are the Alger MidCap Growth Fund (AMCGX) and the Alger American MidCap Growth Portfolio (AMGOX). Both funds have similar portfolios of stocks primarily selected from the Russell Midcap Growth Index. The Alger MidCap Growth Fund has a 5% back load, 2% early withdrawal penalty, 2.04% expense ratio, 1% 12b1 fee and 0.76% management fee.

All but the 0.76% management fee and a 0.91% expense ratio can be sidestepped with the Alger American MidCap Growth Portfolio. Notable combined holdings include Research In Motion (RIMM), National-Oilwell Varco (NOV), Fluor (FLR) and Apple (AAPL).

For more information, check out an explanation of our ratings.