These Rebound Funds Could Add Bounce to Your Portfolio

Back in December 2006, I conceived and initiated a novel experiment in mutual fund investing. My "mutts of the funds" strategy extrapolated that the Dogs of the Dow Theory might work on the macro scale.

The contrarian hypothesis, at the individual stock level, favors picking good companies having a bad year. I tested the concept for mutual funds by selecting funds with positive 2005 returns that were well on their way to losing money in 2006.

So, how did the "mutts" do last year? For 2007, the 18 open-end stock mutual funds designated as mutts averaged 11.62%. By way of comparison, the Dow Jones Industrial Average returned 8.88%, the S&P 500 returned 5.49%, and the Nasdaq Composite returned 10.66% for the same period. As you can see in the table below, 13 of the 18 mutts outperformed all these benchmarks.

Winning best of show at the Baker Kennel Club, the (TEQAX)Touchstone Strategic Trust -- Large-Cap Growth Fund barked the loudest, gaining 26.42%. Fund holdings having stellar 2007 returns include 158.80% in Potash(POT), 133.48% in Apple(AAPL), 126.63% in Research In Motion(RIMM), 140.14% in National Oilwell Varco(NOV), 110.56% in Southern Copper(PCU) and a whopping 250.80% in Sunpower Corp.(SPWR).

Regardless of the apparent victory of the 2007 mutts over the market, it is far too early to declare the strategy a success. Any scientist will tell you that the results of an experiment must be able to be duplicated to confirm the outcome.

There is no guarantee of the mutts of the funds strategy paying off in 2008. The major U.S. stock market averages are hovering between the negative 10% correction level and the negative 20% crash level. If we do have a recession in 2008, all bets are off, and the bear may rule Wall Street.

On the other hand, maybe Thursday's apparent compromise between Treasury Secretary Hank Paulson and the leadership of the U.S. House of Representatives on economic stimulus can help turn the 2008 mutts around. The package, including child tax credits, tax rebates and direct business incentives, is designed to be timely, targeted and temporary.

The package may change in the Senate. But for now, Secretary Paulson expects the IRS to mail out about 116 million checks of up to $600 for individuals making $75,000 or less and $1200 for couples making no more than $150,000. Americans not making enough to owe taxes would get $300. On top of this would be an additional $300 payment per child. Hopefully this will be seen as enough.

2007 Mutts Outperform the Market
Fund	Ticker	Total Return 2007
Touchstone Strategic Trust - Large Cap Growth Fund	TEQAX	26.42%
Natixis Loomis Sayles Growth Fund	LSGRX	22.43%
American Century Ultra Fund	TWCUX	21.83%
American Century VP Ultra Fund	AVPUX	21.02%
Touchstone Sands Capital Select Growth Fund	PTSGX	18.53%
MassMutual Select Aggressive Growth Fund	MGRSX	18.21%
SunAmerica Style Select - Focused Technology Portfolio	STNAX	17.03%
Fidelity Select Medical Delivery Portfolio	FSHCX	16.86%
Kopp Emerging Growth Fund	KOPPX	16.45%
Oak Associates Funds - Pin Oak Aggressive Stock Fund	POGSX	15.02%
TCW Select Equities Fund	TGCEX	13.71%
American Century Life Sciences Fund	ALSIX	12.55%
Aston Veredus Aggressive Growth Fund	AVEIX	12.46%
Rydex Series - Biotechnology Fund	RYOAX	5.25%
AXA Enterprise Equity Fund	ENEBX	4.00%
ProFunds Biotechnology UltraSector ProFund	BIPIX	-4.86%
Bridgeway Micro-Cap Limited Fund	BRMCX	-4.97%
Alpine US Real Estate Equity Fund	EUEYX	-22.84%
Source: Bloomberg

Read this for an explanation of our ratings.

Please note that (ENEBX)AXA Enterprise Equity Fund was acquired by (GCLCX)Goldman Sachs Structured Large-Cap Growth Fund. Also, the (KOPPX)Kopp Emerging Growth Fund was acquired by (ANOAX)American Century New Opportunities. Combined, full-year returns are shown in the table.

Each of the new mutts below lost more than 12% in 2007 after gaining more than 12% in 2006. The list of 2008 mutts is dominated by 11 different small-cap funds. Three of these focus on small-cap growth stocks, while the other eight pick small-cap value stocks. The next largest category is real estate funds. Two of the six real estate funds are index funds looking for a reversal in real estate investment trusts (REITs). The stimulus package also clears Fannie Mae(FNM) and Freddie Mac(FRE) to buy mortgages as large as $625,000. This is a temporary lifting of the $417,000 federal cap that has prevented Fannie and Freddie from helping to stabilize real estate markets where the median home price exceeds the cap.

Editor's Note: As Kevin Baker holds the (CSRSX)Cohen & Steers Realty Shares in a retirement account, he truly hopes the mutts of the funds theory holds up in 2008.

2008 Mutts Stock Mutual Funds Down 12% or more in 2007 after 12%+ Gains in 2006
Fund	Ticker	Rating	Total Return 2007	Total Return 2006
Cohen & Steers Realty Shares Inc	CSRSX	E-	-19.19%	37.14%
DWS Small Cap Value Fund	SCSUX	E-	-18.18%	19.62%
Wells S&P REIT Index Fund	WDJAX	U	-17.71%	34.12%
MainStay Small Cap Opportunity Fund	MOPIX	E-	-17.09%	13.08%
Schneider Small Cap Value Fund	SCMVX	U	-17.08%	21.08%
Hotchkis and Wiley Mid-Cap Value Fund	HWMIX	E	-16.96%	16.58%
RiverSource Real Estate Fund	ARLAX	E+	-16.61%	35.29%
Vanguard REIT Index Fund	VGSIX	E	-16.46%	35.07%
American Century Real Estate Fund	REACX	E-	-15.79%	34.69%
ING Large Cap Value Fund	IVLIX	D-	-15.51%	29.51%
Goldman Sachs Structured Small Cap Equity Fund	GCSAX	E+	-15.42%	12.53%
HighMark Small Cap Value Fund	HMSCX	E-	-14.56%	16.35%
JP Morgan Realty Income Fund	URTLX	E	-14.51%	34.72%
Oakmark Select Fund	OAKLX	E	-14.04%	13.60%
Legg Mason US Small-Capitalization Value Trust	LMSVX	E-	-14.00%	14.59%
Wells Fargo Advantage Small Company Value Fund	SCVAX	E	-13.99%	12.96%
Burnham Financial Services Fund	BURKX	E	-13.96%	17.02%
Allegiant Multi-Factor Small Cap Value Fund	AMRIX	E-	-13.27%	13.29%
Putnam Small Cap Value Fund	PSLAX	E-	-13.08%	17.30%
Lotsoff Capital Management Micro Cap Fund	LCMMX	D-	-13.07%	13.75%
Legg Mason Partners All Cap Growth and Value Fund	SPBLX	D-	-12.77%	12.77%
Sterling Capital Small Cap Value Fund	SPSCX	E-	-12.50%	20.45%
Old Mutual Barrow Hanley Value Fund	OAFOX	E-	-12.34%	14.09%
Source: Bloomberg

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