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Star fund managers recover quickly from tough 2011

BOSTON — The stock market has taken a 180-degree turn.

Those bold enough to take on risk were rewarded as stock funds posted their largest first-quarter returns since 1998. Fueled by a strengthening economy, diversified stock funds returned an average 12.3 percent, according to Lipper Inc.

That's been a welcome shift from 2011, when U.S. stock funds lost an average 2.9 percent, and limiting risk was the best approach.

Technology companies and bank stocks were a key part of the momentum shift. The outlook for both sectors has improved, and their rapid turnaround has produced surprising first-quarter results for mutual fund managers. A half dozen renowned managers are again beating their peers by big margins, after trailing the vast majority last year. Each is a past winner of Morningstar's manager of the year award in his fund category, and four have been honored as top manager of the decade.

Here's a look at the best-known managers among that group, and how they got back on track:


The manager of Fairholme Fund is enjoying a worst-to-first turnaround. Fairholme (FAIRX) posted a 31 percent first-quarter return, best among hundreds of large-cap value mutual funds.

Fairholme finished last in 2011, losing more than 32 percent while the Standard & Poor's 500 index returned 2 percent. It was an unwelcome surprise for Fairholme investors who earned an average 13 percent a year from 2000 through 2009 — 14 percentage points ahead of the S&P 500.

In a recent letter to shareholders, Berkowitz opened with this assessment of 2011: "What a horrible year for performance!" Yet he stuck by his decision to load three-quarters of his portfolio with financial stocks such as insurer AIG and Bank of America. Those two picks lost more than 50 percent last year.

Berkowitz's high-conviction approach has paid off this year, as AIG is up 33 percent and Bank of America has surged more than 70 percent.


This renowned manager made his name beating the S&P 500 for 15 consecutive years through 2005 at Legg Mason Value Trust. Yet he's had mostly disappointing results since then, including a 35 percent loss last year at the fund he now manages, Legg Mason Capital Management Opportunity (LMOPX). It placed at the bottom of the mid-cap value category.

That fund came back to post a nearly 26 percent first-quarter return, beating nearly all its peers. As with Berkowitz, the turnaround is being driven by the resurgence of financial stocks. They recently made up more than one-third of the portfolio. Miller's performance rebound comes as he steps down this month as co-manager of Value Trust.


His PIMCO Total Return fund (PTTAX) returned 2.8 percent in the first quarter, in the top 13 percent of intermediate-term bond funds. That's nothing spectacular for Gross, who runs the world's largest mutual fund, with $253 billion in assets. Total Return's performance over the latest 10-year period beats nearly nine of 10 peers.

But his fund returned just 3.7 percent last year, trailing nine of 10. Gross mistimed a move to sell investments in Treasury bonds, which rallied as investors sought out the least-risky assets last summer. "This year is a stinker," Gross wrote to shareholders last October.

The fund's turnaround is, in part, due to Gross's recent investment in mortgage-backed securities, which have rallied this year.

Several other top managers are back near the top of the charts this year. Most notable are Brent Lynn of Janus Overseas Fund (JDIAX), Michael Hasenstab of Templeton Global Bond (TPINX) and David Herro of Oakmark International (OAKIX).

Here are further illustrations of the shift in the markets, and its impact on first-quarter fund performance:

—TECH IS BACK: Mutual funds specializing in technology were the top performing domestic stock fund category, averaging a nearly 21 percent gain, according to Morningstar. Last year's halting economic recovery translated into a more cautious outlook for tech stocks, and tech sector funds were among the worst performers. Recent economic news has been more positive. And then there's Apple. Shares of the world's most valuable company surged more than 50 percent in the first quarter. That's been a key driver of the strong performance for funds that count Apple as their biggest holding. For example, Fidelity Growth Company (FDGRX) and Putnam Voyager (PVOYX) both returned about 21 percent. Nearly 8 percent of Growth Company's portfolio was recently in Apple, with nearly 9 percent at Voyager.

—DIVIDENDS TAKE A BACK SEAT: Investors in dividend-paying stocks have plenty of reason to be happy. Payouts are at a record high, and the outlook remains strong for continued dividend growth. In 2011, the top-performing stock fund categories were those primarily investing in dividend-payers, led by funds specializing in dividend-rich utilities. Yet those funds were the worst-performers in the first quarter, with an average 1.5 percent return.

—GROWTH STRATEGY RECAPTURES LEAD: For the first time in four quarters, growth stock mutual funds posted a larger average gain than value funds. Growth funds averaged a 15.4 percent return, compared with 12.2 percent for value. Growth stocks are expected to generate above-average earnings and revenue growth, while slower-growing value stocks are considered cheap based on price-to-earnings ratios.

Can the comebacks for these top fund managers and higher-risk investment strategies hold up? It's hard to say. As Berkowitz wrote in his January shareholder letter, a year — let alone three months — doesn't amount to much for long-term investors: "One circling of the sun," he noted, "is too short a time to differentiate between good and lucky."

Questions? E-mail investorinsight(at)