6 Funds That Outperform in Tough Times

NEW YORK ( TheStreet) -- Plenty of investors are furious at their actively managed mutual funds. In recent years, many formerly hot managers have suddenly turned cold. Convinced that it is impossible to pick winning funds, shareholders are dumping old standbys and switching to index funds.

But before you give up on veteran managers, consider that the period since the financial crisis has been unusually difficult for active funds.

The problem has been that the markets have moved wildly. Strategies that worked one year failed miserably the next.

During the turmoil of 2008, cautious funds with high-quality stocks led the pack. But in 2009, the best performers were shaky issues that rebounded from depressed levels. Because of the market shifts, managers who followed a consistent approach were bound to suffer periods of underperformance.

According to an ongoing study by Standard & Poor's, the recent erratic record of funds is very different from other periods. During the early part of this decade, winning funds tended to continue producing above-average results.

Of the domestic equity funds that finished in the top half of the group during the 12 months ending in May 2001, 78.7% repeated their showing by again delivering above-average results in 2002. Of the 2001 winners, 43% stayed in the top half for three years in a row.

In contrast, funds that finished in the top half for the 12 months through March 2008 did much worse in succeeding years. Only 14% stayed in the top half for three years in a row and 5.2% stayed in the top half for five years in a row.

The data should give heart to shareholders of active funds. In recent months, the markets have returned to normal levels of volatility. If that persists, active managers should deliver more consistent results and top funds could once again record long winning streaks.

To find future stars, I looked for funds that had finished in the top half of their categories in each of the past five years. Such funds have proved that they are all-weather performers, able to limit losses in steep downturns and deliver decent results in better times.

In addition, I sought funds with long-tenured managers and below-average expenses. Those are common characteristics of winning funds, according to research by S&P. Funds that pass the test include FPA Capital ( FPPTX), MFS Growth ( MFEGX), Sentinel Common Stock ( SENCX), T. Rowe Price Equity Income ( PRFDX), T. Rowe Price New America Growth ( PRWAX) and Wells Fargo Advantage Growth ( SGRAX).

Among the steadiest performers is Sentinel Common Stock. The fund has finished in the top half of the large blend category 10 years in a row. Portfolio managers Dan Manion and Hilary Roper limit risk by focusing on high-quality blue chips that sell at modest prices.

Holdings include Procter & Gamble ( PG), Microsoft ( MSFT) and Johnson & Johnson ( JNJ). Those rock-solid names helped the fund excel when stocks cratered in 2008.

T. Rowe Price Equity Income has landed in the top half of the large value category in seven of the past eight years. The fund focuses on dividend-paying stocks that have slipped out of favor. Veteran portfolio manager Brian Rogers has a big stake in solid financials, including American Express ( AXP) and Wells Fargo ( WFC). Rogers is a long-term investor, turning over 15% of his portfolio annually. In contrast, the average large value fund turns over 80%.

MFS Growth favors stocks with strong balance sheets and high returns on equity. The fund has finished in the top half of the large growth category in nine of the past 10 years.

Portfolio manager Eric Fischman looks for companies that can increase earnings over long periods. The portfolio has a big stake in technology blue chips, including Apple ( AAPL) and Google ( GOOG), stocks with strong earnings growth and modest price-earnings multiples.

T. Rowe Price New America Growth buys stocks of all sizes. The fund emphasizes fast-growing sectors such as technology and health care. Holdings include eBay ( EBAY) and software producer Adobe Systems ( ADBE). The fund has finished in the top half in eight of the past nine years.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.