Some fallen mutual funds are turnaround candidates

INVESTING

A fish out of water may be about ready to catch high tide

Dollars & Sense

January 02, 2000|By Russ Kinnel | Russ Kinnel,MORNINGSTAR.COM

Buying stocks simply because they have fallen is no better a strategy than buying simply because they've gone up. The same is true for funds. Still, there are a few good reasons to look for turnaround candidates among mutual funds.

First, if you've left your portfolio untouched, you've probably got greater weighting in the hotter sectors and funds than you did at the beginning of the year. If you want to rebalance, then these funds are good choices.

Second, the media are full of stories about this year's tech heroes, but there are plenty of good funds you could miss amid the hype.

Finally, funds often suffer down years simply because the market rotates away from the sectors that a manager favors.

When those sectors get cheap enough, they can produce an explosive rally. Gabelli Asset, for example, had a couple of down years when investors gave up on cable and media stocks. Then Bill Gates noticed that cable is a great way to deliver Internet access and Microsoft bought a piece of Comcast. Gabelli's funds have been on a three-year hot streak since then.

Value funds have been out of the spotlight as growth dominates, so I looked for some value funds that have been underperforming other value funds but still have a great record.

Clipper (http: //quicktake. morningstar.com/funds/snapshot/CFIMX.html)

Talk about a fish out of water. This fund's managers like their stocks cheap and if they can't find enough, they'll buy bonds or park a lot of money in cash.

While others were making a killing in tech, this fund was holding bonds, financials and Philip Morris. Still, it has managed to do well over the long haul, so I wouldn't bet against it. A rally in financials or tobacco stocks would be a big help.

Fidelity Destiny I (http: // quicktake.morningstar.com/ funds/snapshot/FDESX.html)

This fund's 3 percent year-to-date return is only slightly below the large-value average, but how often will I get a chance to put George Vanderheiden on a comeback list?

Sequoia (http: //quicktake. morningstar.com/funds/snapshot/SEQUX.html)

While Clipper needs a tobacco rally, this fund needs a Berkshire Hathaway rally. They've got more than one-fourth of assets riding on Warren Buffett. Naturally, that has made for awesome long-term returns but the fund is down nearly 15 percent this year. By picking Sequoia to rebound, I am boldly betting that Buffett will make some money for investors.

A second group of comeback kids fall into the Japanophobe category. They've done well in the past, but have completely missed out on this year's remarkable rally in the land of the rising sun. If Japan's returns are more pedestrian in the coming years, these funds should be sitting pretty.

Harbor International Growth (http: //quicktake.morningstar. com/funds/snapshot/HAIGX. html)

This portfolio has a grand total of zip in Japan because its managers think Japanese stocks are too pricey. They look for stocks with healthy growth rates but are picky about what they'll pay. As a result, they are bringing up the rear this year. Like Clipper and Sequoia, though, this is a very concentrated fund that figures to be volatile in just about any market.

BT International (http: //quicktake.morningstar. com/funds/snapshot/BTEQX. html)

This one has actually overcome its fear of Japan and started to invest there. However, the managers missed out on most of the rally and have the wimpy returns to prove it. Even so, this will be the first time in the fund's seven-year history that annual returns didn't beat the foreign-fund average.

For free investment information and analysis, check out www.morningstar.com/

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