When bad things happen to good funds, look at that as time to buy, writes Richard Moroney of The Turnaround Letter.

We strongly believe that diversification is the best way for investors to reduce risk. Therefore, it should be no surprise that we think mutual funds are great vehicles for many investors, because they provide ready-made diversification.

However, just as we don’t recommend chasing the hottest stocks, we advise against pursuing the hottest mutual funds. Instead, we are attracted to funds with strong long-term records where the manager has recently stumbled.

Even the best fund managers have a cold streak occasionally. Sometimes it’s because they made a few bad bets; sometimes the market will take a funny turn for a while that doesn’t favor their approach; and sometimes they are right, but too early.

Whatever the reason, it is usually temporary, and the managers eventually revert to their market-beating form. When that happens, investors who get in toward the end of the cold streak are handsomely rewarded.

Last year was a strange one for the markets, and that threw a number of talented fund managers off their game. This was particularly true of fundamental, valuation-oriented managers, because for much of the year, headline-driven sentiment overwhelmed valuation fundamentals. As the markets settle down again, we expect many of these managers to rebound with strong years.

The funds discussed below all have good long-term records, and they all posted relatively poor returns in 2011.

Calamos Growth (CGRRX)
The flagship fund of Calamos Asset Management, the management company controlled by John Calamos Sr., who has been at the helm since the fund’s founding in 1990. He is joined on the management team by his son and nephew, among others.

The fund has a good long-term record, including strong performance in 2009 and 2010. It had big rebounds after its last two down years in 2002 and 2008, so there is good precedent for optimism about 2012.

CGM Focus (CGMFX)
The fund name is apt in that its manager, Ken Heebner, is known for at times focusing the fund on fewer than 25 stocks, and not being afraid of portfolio turnover.

Heebner had a great run in the early 2000’s, culminating in a 79% gain in 2007. More recently, however, he has been hurt by a 48% decline in 2008 followed by another 26% slide was a bet on airlines. But, as shown by our recommendation of Delta (DAL) last November, we think that bet may ultimately pay off.

Fairholme (FAIRX)
This fund's strong returns with Bruce Berkowitz at the helm led to a surge in assets from $49 million in 2004 to $18.8 billion by 2010.

One of the noteworthy features of Fairholme is that its 2011 performance was worse than 2008. Berkowitz tends to take big bets, and last year his focus on financials hurt the fund badly.

He is sticking with his bets, however, as the portfolio’s top ten holdings consist largely of financials and insurers. Moreover, the top ten account for about 84% of fund assets. Early returns in 2012 in these sectors have been good, and if that trend continues, this could be a banner year for Fairholme.

Federated Kaufman (KAUAX)
Led by Hans Utsch and Larry Auriana, a couple of veterans who have been around long enough to remember the carnage of the 1974 bear market as well as the 1987 collapse—experiences that they are no doubt drawing upon after some volatile returns in recent years.

Most holdings are small and mid-cap growth companies, with the fund’s top ten holdings accounting for 27% of the portfolio, primarily in IT and healthcare.

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