Three Funds That May Bounce Back Big

04/17/2008 12:00 am EST


Tim Middleton, contributor to MSN Money, says beaten-down stocks tend to do best in a market rebound and he names three in the market’s most depressed areas.

My boss and I will invest this year's special tax rebates in big-screen TVs, which is exactly the kind of frivolous spending Congress had in mind when it created them.

[But] the smartest folks will invest their rebates. The last time a Bush administration recession (in 1990-91) was followed by the president's exit, markets rallied hugely, led by the most downtrodden group, financials.

If history is any guide, [financials and] other beaten-down groups are destined to become leaders when the next bull market begins.

T. Rowe Price Financial Services fund (PRISX), Morningstar’s favorite no-load fund in this category, sank 9.4% last year and, as of March 31st, was already down 12.9% in 2008. More commonly, though, the fund is a top-quartile performer, managed by T. Rowe's ace picker of financial stocks, Jeff Arricale.

One of the prime attractions of this fund is that it puts a third of assets into midsize stocks, a handsome group with which T. Rowe has proved particularly adept. Many of the most distressed names are among its top holdings, from Citigroup (NYSE: C) to Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). Stocks such as these got the market into its current mess, and the market won't emerge until they do.

Turner New Enterprise (TBTBX) is a particularly volatile representative [of] the volatile technology sector. It had dropped 19% this year, as of March 31st, but gained more than 20% in each of the past five years. Lead manager Christopher McHugh runs a concentrated portfolio of issues he expects to deliver the biggest profits going forward. McHugh trades heavily—turnover is nearly 200%—and packs half his assets in small and midsize companies.

With 15 years of experience, co-manager Bruce Monrad of Northeast Investors (NTHEX) has far longer tenure than most mutual fund managers, and he is the junior partner of his father, Ernest, who began running this junk-bond fund in 1960. Their track record is exemplary, and their annual expenses are a rock-bottom 0.68%, less than many exchange traded funds.

The Monrads own paper as ugly as Donald Trump's coiffure—in fact, their top holding is Trump Atlantic City bonds—but that's what you want from low-rated, high-yielding debt. Amid a recession, yields on this junk have spurted to roughly seven percentage points over Treasurys of similar maturity, from only two points two years ago. This fund has a current yield of 8.4%.

The combination of a recession's end and a new presidential administration has benefited these groups in the past, and they look ripe for advancement now. Your rebate invested in these funds may or may not help the nation's bottom line, but it will help your own.

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