What’s First to Recover?

11/17/2008 12:30 pm EST

Focus: FUNDS

Russel Kinnel

Editor, Morningstar FundInvestor

Russell Kinnel, editor of Morningstar FundInvestor, offers two strategies to profit in the market’s recovery.

For the most part, the funds that led the way in the rebound from the fall 2002 bear market or the 1989—90 financial meltdown, weren’t the funds that held up well in those times, but the ones that got torched.

After the swoon in financials, it was financials-heavy funds that enjoyed a great run from 1990 until 2007. And in 2003, tech, aggressive growth, emerging markets, and junk bonds—the same groups that dropped precipitously in the bear market—were the standouts. Only emerging markets continued to be a standout over the next five years.

You usually see a big snapback in the hardest-hit sector, but there’s no certainty that it will lead for a long time, nor about where the bottom is. PIMCO is forecasting that home prices won’t bottom out until 2010. If true, it’s hard to imagine financials escaping turbulence anytime soon.

With smart investors like Warren Buffett and Jeremy Grantham saying that stocks are cheap, I feel confident a lot of funds are going to prove to be good investments today even if we aren’t at the bottom. My buy list is grouped by: 1) Stalwarts have held up better than most, and 2) Rebound plays have gotten smacked but have great managers who still know what they’re doing. If your portfolio is full of financials—heavy, beaten-down funds like Clipper (CFIMX) and Weitz Value (WVALX)—go with the stalwarts. Or if your funds sidestepped the mess in favor of healthier companies—go with the rebound plays.

I’m imitating Jeremy Grantham by buying carefully and slowly. (Boosting your 401(k) contribution is one way.)

Stalwarts: Sequoia Fund (SEQUX), Jensen Fund (JENSX), Royce Special (RYSEX), Fairholme (FAIRX), Vanguard Primecap Core (VPCCX), Allianz (NFJ) Small Cap Value (PSVIX), Artisan International Value (ARTKX), and Harbor Bond (HABDX) have done brilliant jobs steering through the bear market. The stock funds have generally owned companies with little debt, making them far less dependent on wobbly banks. They are run by great stock-pickers whom I trust to find great bargains amid the meltdown.
Rebound Plays: If you own these funds you might be too mad to send them more money. They underestimated the severity of the financial debacle and got burned. Yet, they have made money for their investors over the long haul, protected against losses in other bear markets, and still have the people and strategy in place that have worked well over a long time period. They might come roaring back when financials get off the mat. My rebound bets are Longleaf Partners (LLPFX), Selected American (SLASX), Dodge & Cox Stock (DODGX), Dodge & Cox International Stock (DODFX), and Loomis Sayles Bond (LSBRX).

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