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) - Get Report

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) - Get Report

, 126.63% in

Research In Motion

(RIMM)

, 140.14% in

National Oilwell Varco

(NOV) - Get Report

, 110.56% in

Southern Copper

(PCU)

and a whopping 250.80% in

Sunpower Corp.

(SPWR) - Get Report

.

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.

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) - Get Report

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) - Get Report

Cohen & Steers Realty Shares in a retirement account, he truly hopes the mutts of the funds theory holds up in 2008.

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.