John Waggoner| USA TODAY
Ancient people spent an awful lot of time piling up large rocks, in part to discover just how long it took Earth to go around the sun. Modern people have (generally) dispensed with the large rocks and settled on 365.25 days. We use that unit to measure many things, such as our own age and the amount of time it seems to take Congress to reach a budget agreement.
Whether or not you should measure your mutual fund's performance by the time it takes Earth to cycle around the sun is another question. In fact, you might be better measuring how your fund fares in a full market cycle — from bull to bear and back, or vice versa.
Of the 663 large-company stock funds from the top of the last bull market in September 2007 to today, 225 posted above-average performance in both the 2007-2009 bear market and the bull market that continues (possibly) to this day. Let's take a look at a few of them and see what they have in common.
Lipper divides large-company funds into three categories:
• Value funds, which look for beaten-down stocks that have the potential to return to Wall Street's favor. In theory, since these funds buy stocks that have already been clobbered, these stocks will get clobbered less in a bear market. Many value funds also have above-average dividend yields, which help soften the effect of a downturn. But value managers generally won't buy the stocks that really fly in a bull market.
• Growth funds, which look for stocks of companies with high potential earnings growth. These funds buy stocks that soar in good times, and land like Wile E. Coyote at the bottom of Dry Gulch when the bull market ends.
• Core funds, which look for companies with GARP: growth at a reasonable price. In theory, this should be the best of both worlds, although it's much harder in practice than in theory.
No categories are as neat as people would like them to be. Few growth managers will admit that they don't give a fig about a stock's price, relative to earnings. And few value managers will say they have never given a thought to a stock's earnings prospects. But the classifications do give you some idea of how a manager invests.
In the value camp, the winner is John Hanco*ck Disciplined Value Fund (ticker: JVLAX). The fund fell 47.8% from the end of September 2007 through February 2009. Bad as that seems, it's better than the 54.1% tumble the Standard & Poor's 500 took during the same period, with dividends reinvested. The fund has gained 161% since the bear market bottom, for a round-trip gain of 36.4%. (The S&P's round-trip record was 25.8%.)
Not surprisingly, managers Mark Donovan and David Pyle aren't hard-core value managers: They look at industry earnings trends as well as traditional value metrics, such as price-to-book ratios.
Interestingly, an index fund, PowerShares Dynamic Large Cap Value Portfolio (PWV), also made the cut. While expensive for an index fund — it charges 0.59% in expenses a year — it's cheaper than the John Hanco*ck offering, which charges 1.20% a year, as well as a front-end sales charge.
Laudus Growth Investors U.S. Large Cap Growth Fund (LGILX) was the best round-trip fund in the growth camp, racking up a 56% round-trip gain. Both managers are new — they started at the helm in November 2012 — so it's hard to give the fund in its current incarnation too much credit.
A better bet might be the ancient Putnam Voyager fund (PVOYX), launched in 1969. Current manager Nick Thakorehas been at the helm since November 2008. The fund has scored a 49.6% gain during the full market cycle.
The top growth fund is — again — an index fund. PowerShares QQQ Trust (QQQ), which tracks the Nasdaq 100 index, has gained 59.2% for the cycle, thanks in large part to its biggest holding, Apple.
And the world according to GARP, the winner is the Managers AMG Yacktman fund (YACKX), up 89.6% in the round trip. Don Yacktman, the chief manager, has been at the helm since 1992, and his son has worked on the fund since 2002.
No word on the grandchildren's role as yet, but they could do worse than learning at their grandfather's knee. The fund trades rarely — its turnover rate is just 7% — and tends to hold a relatively concentrated portfolio of high-quality, reasonably priced names like Procter & Gamble, Microsoft and Coca-Cola. The fund lost 39.7% during the bear market and gained 214.5% during the bull phase.
As the Securities and Exchange Commission likes to remind us, past performance is no guarantee of future returns. But looking at a fund's record in bull and bear markets gives you an idea of what you can expect in a bad market and a good one.
Of course, we can only hope that few people put their entire fortune into a fund at the start of the bear market in 2007. Those who started investing $100 a month into funds at the end of September of 2007 did pretty well, though. In the case of the Yacktman fund, $100 a month — $7,300 total — would have become $11,740. It's not easy to hang onto a fund in a bear market. But it is easier than piling up large rocks.
