Three Top Funds from a Lost Decade

12/14/2009 1:00 pm EST

Focus: FUNDS

Russel Kinnel

Editor, Morningstar FundInvestor

Russel Kinnel, editor of Morningstar FundInvestor, names three finalists for Morningstar’s Manager of the Decade award, and tells why they’ve done so well.

As we prepare to hand out a Manager of the Decade award, I was curious which funds had made the most or lost the most money for investors.

That leads us to a compelling group that didn’t just put up good returns when no one was around but consistently produced good returns so that shareholders had an easy time making money in them.

Bill Gross and the team at PIMCO have achieved something very special. They began the decade with the largest bond fund—PIMCO Total Return (PTTDX)—and proceeded to produce another great decade of performance.

True, this was a decade that was kinder to bond-fund managers than stock-fund managers, but there were still huge potholes along the way. We’ve seen two credit meltdowns and the first-ever mortgage meltdown.  PIMCO Total Return worked well for investors throughout the decade, because it was a steady hand through all the troubles.

The fund outperformed in each of the first nine years of the category and only lagged its benchmark by a smidgen in three. The most important bit came in 2008, when most funds in the category lost money, but PIMCO Total Return gained 4.8% because Gross and team saw much of the mortgage train wreck coming.

It also helped that most of this fund’s assets are in the low-cost institutional shares. Low-cost funds have lower hurdles to overcome and tend to take on less risk as a result.

Like PIMCO Total Return, American Funds EuroPacific Growth (AEPGX) has produced consistently excellent relative performance and has been remarkably successful at doing so with a huge asset base.

There are some big differences with PIMCO Total Return, though. First, EuroPacific’s returns are driven by stock selection, whereas PIMCO makes top-down calls on yield curve, sectors, and interest rates. In addition, EuroPacific took a 40% hit in 2008 that cost investors a lot of money, but the fund still lost less than most foreign funds. It also outperformed in 2009, so people who did stay with the fund were rewarded.

Joel Tillinghast’s  Fidelity Low-Priced Stock’s (FLPSX) wide-ranging portfolio is predominantly in the small-mid/value-blend [area]—the place to be for much of the decade.

Tillinghast invests in hundreds of names, and that helps limit losses in downturns. Yet his stock selection has been strong enough that the fund has consistently produced solid returns in rallies. That’s no mean feat for a sole manager. Once again, that steady relative performance even as the market rises and falls has helped investors make the most of the fund.

It also was closed to new investors to varying degrees throughout the decade. The closings generally came when assets were flowing in after a period of strong performance. Closing not only helped managers cope with more manageable flows, but also prevented investors from jumping on the bandwagon and buying high after a rally.

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