2. Heartland Value (HRTVX), run by William J. Nasgovitz. Small-cap funds have really done a bang-up job lately, but since we shouldn’t count on that to continue, look through the funds in the aggressive-growth list for something with more large-cap exposure if you’re going to put a sizable portion of your capital into a small-cap fund. The fact that it’s a value fund doesn’t make this fund any safer than other stock funds. However, the fact that Nasgovitz is at the helm does. This is a guy who’s been in the game for thirty years, a really seasoned pro who knows what he’s doing and who especially knows how to make money while almost everyone else is losing it. Nasgovitz was up 2.03 percent in 2000, and then a gargantuan 29.45 percent in 2001. His fund fell 11.49 percent in 2002, which would have been a great time for you to buy in because Nasgovitz came back with a 70.16 percent gain in 2003. That more than totally eradicates even the memory of his 2002 loss. Nasgovitz then had a couple of slow years in 2004 and 2005, when he gained only 9.10 percent and 1.99 percent, lagging the market. Then he came back with a stellar year: in 2006 his fund gained 28.02 percent. Nasgovitz is a seasoned guy, and I would trust his fund with money from older investors, and younger ones who want to feel safe.
3. Berwyn (BERWX), run by Edward A. Killen, another seasoned professional. Finally we’re looking at a fund that invests in large-cap stocks, not just puny small-cap names, so if you want some diversification based on company size, and trust me, you do, Killen’s fund is a good place for mutual fund investors more comfortable with value funds to go. Killen can keep 20 percent of his portfolio in bonds, but as of now he has no bond exposure. That would pull his returns down. He does have over 9 percent of his portfolio in cash as of late summer 2007, and I consider that the mark of a truly experienced investor. Like the good fund managers on my lists, who know how to protect you from losing money, Killen had a strong 2000 compared to the market and an amazing 2001, followed by a loss, albeit a single-digit one, in 2002. He was up 2.10 percent in 2000 and 28.93 percent in 2001, and lost 6.88 percent in 2002. Killen’s 2001 performance should make most money managers jealous. His 2000 performance would also make most mutual fund manager jealous, since they largely lost money that year. Killen’s had a good run since 2002. He posted a 50.01 percent gain in 2003, followed by a 22.83 percent gain in 2004 and a 12.18 percent gain in 2005, and then for the first time since 1999 he failed to beat the S&P 500 in 2006, posting a mere 6.71 percent gain.
If you choose to place your money under Killen’s stewardship, I think you’ll be in good shape. It’s possible he’s losing his edge, but then again, I also find that a good money manager gets better, if less intense, with age. The guy knows how to avoid the losses, although I do have to wonder about money managers who lost money in 1999. I’m willing to give Killen a pass for that, because you’d rather invest with someone who won’t abandon his convictions to chase hot stocks that he doesn’t really believe in. I have nothing against chasing hot stocks with no conviction—I became great at it—but it’s a dangerous game to play, and you’re probably better off with a more serious money manager. Killen is therefore an ideal manager for older investors looking for a steadier hand to guide their investments—your mother-in-law, or anyone looking to retire soon. Killen won’t chase fads, and he’ll protect you from losses in his terrific value-oriented fund.
4. Muhlenkamp (MUHLX), run by Ronald H. Muhlenkamp. Muhlenkamp likes to hunt for undervalued companies that nevertheless generate large profits and a lot of cash flow, which is what you’d expect from a value manager. His record with this large-cap value fund meets my basic criteria too, if in a more understated fashion than some of the other money managers. Muhlenkamp posted a 25.3 percent gain in 2000, followed by a 9.35 percent gain in 2001. Then, like most of these guys, he turned around and lost big in 2002, down 19.92 percent. That’s a large loss, but the gains in 2000 and 2001 outweigh it significantly, and the 48.08 percent gain in 2003 also makes it seem less consequential. The really good value guys made money in 2000 and 2001 but still got hit hard in 2002, which is a lot more than you can expect from most fund managers, or most value managers, who also came up short in 2001. Since 2003, Muhlenkamp’s gains have been solid but unimpressive. A 24.51 percent gain in 2004 looked promising, but it was followed by a 7.88 percent gain in 2005, which at least was better than the benchmark, and a 4.08 percent gain in 2006, which wasn’t better than much of anything.
At the end of June 2007 Muhlenkamp was sitting on a big position in Countrywide Financial, which became a much smaller position because Muhlenkamp held on to it through July and August as the stock got cut in half, thanks to so many people defaulting on their mortgages. The risk here isn’t that subprime mortgages will hurt you if you put your money in Muhlenkamp’s fund. The risk is that he’s lost his touch, and instead of making people money in bad markets, he might start losing you money in good ones. Then again, a lot of smart people got housing wrong. Is Muhlenkamp as good as the top guys on this list? Maybe not, but time will tell, and he’s better than anyone except my top guys. If Muhlenkamp is offered on your 401(k), though, you’ve hit the jackpot because funds this good are rarely offered in 401(k) plans.
Honorable Mentions
These are funds that are worth investing in and that my methodology picked up as winners, but they aren’t as good as the other funds on the list. If the other eleven fund managers were not around, these two would be at the top of the pile. Since there are better funds out there, and you’ve just read all about them, I would invest with them before I considered the honorable mentions. Still, these are two strong funds with strong managers and they deserve credit for their performance, just not as much credit as the other funds I’ve recommended.
1. SSgA Aggressive Equity Fund (SSAEX), run by Michael Arone. This is another fund that had a big 1999, up more than 120 percent, but suffered less than the market as a whole from 2000 to 2002. Arone tries to invest in stocks that are undervalued based on their growth, a process that I often lead viewers through during episodes of Mad Money. I doubt Arone uses the same method I employ, which is a simple rule of thumb, but his approach is basically sound. Arone had no wins in 2000, 2001, or 2002, but he did have smaller losses than the overall market in 2000 and 2002, when he was down 2.57 percent and 12.09 percent, respectively, compared to a 9.06 percent loss for the S&P 500 in 2000 and a 22.15 percent loss in 2002. Arone lost 19.63 percent in 2001, worse than the S&P’s 12.02 percent decline. These returns are nothing to write home about, but a smaller-than-average loss coming off such a huge 1999 gets my attention. Arone was up 33.96 percent in 2003, more than 5 percentage points above the S&P 500’s return, and he beat the S&P again by less than a point in 2004. Over the past two years, his fund has lagged the S&P 500 by 2 percentage points each year. I wouldn’t invest in this mutual fund, but I do have confidence that Arone will start beating the indexes again. I just have a lot more confidence in the top five aggressive-growth funds I listed. If this fund is one of the offerings in your 401(k) plan, I’d take it over an index, but otherwise you’ve got five great aggressive-growth funds to choose from—why buy the one fund that’s merely good?
2. Robeco Boston Partners Small Cap Value II (BPSCX), run by David Dabora. Dabora’s figures for 2000 and 2001 just blew me away. I know you’re sick of these small-cap funds, but they have been the winners. This is another small-cap value fund, but Dabora’s a little different from the other value managers in that he was up 44.41 percent in 2000 and 47.49 percent in 2001. I was both shocked and awed when I first saw those numbers. You give your money to a manager so that he can produce results that are one-quarter that good during a down year. Dabora’s 15.94 percent loss in 2002 is nothing next to his gains the two years before, both greater than 40 percent. Following a pattern that should be pretty familiar to you by now, he came back with a 52.90 percent win in 2003. His returns over the past three years were fine, but nothing special: 16.47 percent in 2004, 7.54 percent in 2005, and 15.66 percent in 2006. I will say that, at the end of July 2
007, Dabora had way too much exposure to the financials, and especially to the mortgage issuers who had been self-evidently not worth owning for months, if not a year, before that point. If the guy loses money in 2007, he can blame his huge position in American Home Mortgage, a position that delivered a 96.65 percent loss in 2007 alone. His big position in IndyMac doesn’t exactly inspire confidence either. Maybe IndyMac will eventually recover, but American Home Mortgage went bankrupt. It just seems like a big, obvious, avoidable mistake to have kept so much mortgage exposure on the table when Dabora did. That said, we need funds for all seasons, and from where I’m sitting in September 2007 it’s possible Dabora could be right. The guy is still a great manager, and I’m man enough to admit that he could be right and I could be wrong. The only better funds out there are on this list. I’d invest with Dabora if his fund were offered in my 401(k), but I would rather own one of the top three value managers on this list before picking him.
You’ve got thirteen actively managed mutual funds representing growth, value, and aggressive growth. At least ten of these funds are absolutely worth investing in, and even if you prefer not to take my recommendations, you know how I put the lists together, and I believe my method works, so you can use it to pick your own funds. Maybe you’d rather invest in stocks than mutual funds, which would be the right move.
But let’s say you’re someone who doesn’t have the time to go through these funds and research them. How can you still be a good mutual fund investor? I’ll give you two options that are quick and easy to understand. They should make you all the money you’re after. So here’s how you can do well with mutual funds in as few words as possible.
First option: invest all of the money you intend for stocks in the Vanguard 500 Index Fund (VFINX). This is a great, low-cost index fund that will deliver returns essentially equal to what the market produces every year. You won’t beat the market, but you won’t get beaten either, and that’s what happens to most mutual fund managers. For your bond exposure (10–20 percent in your 30s, 20–30 percent in your 40s, 30–40 percent in your 50s, 40–50 percent in your 60s, and 60–70 percent once you’ve retired), invest in a low-cost short-term bond index fund like the Vanguard short-term Bond Index (VBISX), or if you’re wealthy, one of Vanguard’s Admiral funds that invests in municipal bonds. You will have to stay on top of this bond option. One day it will pay to invest in longer-term bonds, but right now—and for the foreseeable future—the best gains are to be had in the shortest maturities because of the decision by the Federal Reserve to keep cash rates high to stifle inflation. When rates on longer-term bonds, meaning more than ten years, climb above 6 percent, or if short rates fall below 4 percent because of aggressive rate-cutting, you will have to readjust what’s known as the “duration” of your bonds and go out longer-term. Right now, though, short rates are a gift and you want to take advantage of them until they go down or longer-term rates dramatically exceed them.
Second option: invest one-third of your money for stocks in Ken Heebner’s CGM Focus Fund (CGMFX), another third in Charles Akre’s FBR Small Cap Fund (FBRVX), and the last third in Edward Killen’s Berwyn (BERWX). Invest in the same bond funds I just recommended to get your bond exposure. As long as you’re invested in these funds, you should at the very least check once a month to make sure that the managers I named are still running the show; if they’re gone, you have to sell. That’s the least amount of homework you can get away with and still be a decent mutual fund investor.
Now you’ve got my list of great mutual fund managers, a fabulous list of my favorite long-term stocks, not to mention two new sets of rules for investing that directly apply to individual investors who manage their own money. You know why you should save, how to avoid going broke, how to set yourself up for retirement—you’ve got everything you need to ensure your long-term wealth, from big-picture general advice right down to the little details, such as which are the best funds and stocks to own. Now get ready to get rich, stay rich, and stay mad…for life!
Also by James Cramer
Confessions of a Street Addict
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You Got Screwed!
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Jim Cramer's Real Money
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Jim Cramer's Mad Money
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Jim Cramer's Getting Back to Even
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Jim Cramer's Stay Mad for Life Page 28