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Mutual Funds Fit for Bull, Bear Markets

NEW YORK ( TheStreet) -- The best-performing mutual funds during the downturn of 2008 were cautious choices that stuck to blue chips. In the rebound of 2009, many of the leaders focused on small-company stocks that skyrocketed when it became clear they wouldn't go under.

Did any funds excel in both years? To find out, I asked mutual-fund-ratings firm Morningstar to screen for U.S. stock funds that finished in the top 25% of their categories in both years. Of 4,200 funds, 106 survived the cut.

Some managed to stay ahead by making well-timed moves in and out of cash. For example, FBR Large Cap Financial (FBRFX) put more than 40% of assets in cash during 2008, a move that helped the fund outpace 85% of its competitors. Then the fund lowered the cash stake to 5% in 2009, buying depressed shares near the bottom and outdoing 76% of peers. A big cash stake helped Fairholme (FAIRX) outdo 94% of its large-blend competitors in 2008. ("Blend" funds buy both growth- and value-style stocks.) Well-timed moves into health and financial shares enabled Fairholme to top 91% of peers in 2009.

While both Fairholme and FBR have strong long-term records, I preferred looking for choices that didn't excel because of cash holdings. After all, even the best managers can sometimes mis-time their moves to cash. My final selections finished high in the rankings by focusing on high-quality growth companies selling at modest prices. During the downturn, such solid stocks suffered relatively small losses. When the market revived, the undervalued names surged as their earnings outlooks improved.

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