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June 20, 2011

From first to worst

Bloomberg notes that three fund managers who used be at the top of their game are struggling mightily.

Bruce Berkowitz, Kenneth Heebner and Bill Miller, three of the best-known U.S. stock pickers, are competing for last place this year after their bets on an economic expansion backfired.

Funds run by Berkowitz of Fairholme Capital Management LLC, Heebner of Capital Growth Management LP and Miller of Legg Mason Inc. are the three worst performers among large diversified U.S. mutual funds in 2011, according to data from Chicago-based Morningstar Inc. The funds lost 11 percent to 12 percent through June 9, compared with a gain of 3.4 percent for the Standard & Poor's 500 Index.

Here is what reporters call the "money quote":

"People assume because certain managers have had good streaks that they are always going to be a step ahead of the market," Russel Kinnel, director of mutual fund research at Morningstar, said in a telephone interview. "It never works out that way."

Indeed. As much as we may wish that a winning fund will always be a winner, that's just not the way it is. This is why SMI offers a Fund Upgrading approach that identifies and recommends the funds — in various risk categories — that are the best performers at any given time. We care little that a fund was a top performer three years ago, or even last year. We want to know what it is doing now.

We've held funds managed by the above-mentioned managers in the past. All three of these guys are smart and capable, and we hope they'll have future success. But we're not going to hold the funds they manage unless those funds are currently outperforming others in their peer group. That's why Upgrading has strongly outperformed the market over time.

All mutual funds — even the most successful over the long haul — go through periods of adversity. When they do, we move on, because that is in the best interest of those using our Upgrading strategy.

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