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Suddenly Stupid?

Even great fund managers slump. Don’t sell; buy the dips.

The bear market has clobbered plenty of investors, but among the notable victims are fund managers who were once ranked as stars. The most famous is Bill Miller of Legg Mason Value, who managed the remarkable feat of outpacing the S&P 500 for 15 years in a row. That streak ended in 2006 — and then the fund sank. Miller now lags behind 99 percent of his large-blend competitors for performance during the five years ending in May. Other managers who have suffered steep declines include Ron Muhlenkamp of Muhlenkamp Fund, Bill Nygren of Oakmark Select and Wally Weitz of Weitz Partners Value.

Shareholders bearing witness to the dismal performance have been dumping the shaky funds, but that could be a big mistake. As we well know, investors are very good at buying at the top of the market and selling at the bottom. And the current downturn presents an unusual opportunity to buy a strong manager in an off-year — and put your clients in a position to ride the fund through its inevitable rebound.

Because chances are, these once-brilliant managers have not really lost their shine. All three managers have knocked out great performance in the past because they make risky and highly concentrated bets. In the short term, they sometimes run into speed bumps; but over the long term, they have strong records. Consider Bill Nygren. He may have lagged 98 percent of his competitors over the past five years, but his fund has been in the top fourth percentile over the past 10. And Oakmark's recent decline is hardly surprising. Like all investors, Nygren periodically hits a slow patch. In the past, he has always bounced back sharply.

Break A Legg

Of course, for many shareholders, Bill Miller's slump is particularly troubling. After seeing Miller defeat the index year after year, some investors came to view him as performer who could not fail. In fact, Miller's streak was always something of a fluke. He outperformed during calendar years, but sometimes lagged over other periods. Throughout his tenure, Miller could never be considered a low-risk manager. For starters, his fund is not broadly diversified, holding only about 35 stocks, and the fund keeps big positions in a few names. In recent years, Legg Mason owned shares of homebuilders and mortgage lenders such as Countrywide Financial. When those stocks soured, the portfolio sank.

An eclectic investor, Miller looks for stocks selling at discounts that seem likely to surprise the markets. The philosophy sometimes leads him to troubled holdings, such as current positions in Sears and Eastman Kodak. But Miller also owns growth stocks when he thinks that they are underappreciated (big holdings currently include Amazon and Yahoo).

Like Bill Miller's fund, Oakmark Select is not for the faint of heart. Veteran manager Bill Nygren keeps a concentrated portfolio, holding only 15 to 20 stocks. When just a few holdings disappoint, the fund drops to the back of the pack. Many of Oakmark's recent problems can be traced to housing-related stocks such as Home Depot and lender Washington Mutual. Nygren looks for companies with strong businesses that are selling at big discounts. Often such unloved stocks face problems, but Nygren has a long record of buying shares on the cheap and holding for years. The fund has a tiny turnover ratio of 10 percent.

Weitz Partners Value is also a highly focused fund: It currently owns only 26 stocks. A contrarian, portfolio manager Wally Weitz buys stocks that others hate. The resulting portfolio rarely produces middling results. During most recent years, the fund has finished in the top or bottom quartile of its category.

Meanwhile, housing and financial stocks have had a big impact on Muhlenkamp Fund. Portfolio manager Ron Muhlenkamp often picks stocks that stand to benefit from trends in the economy. With the economy sluggish in 2001, he began buying homebuilders and lenders, figuring that they would prosper when GDP revived. The move proved to be on target, and the fund outdid more than 90 percent of its competitors in 2003 and 2004. But Muhlenkamp was still holding housing stocks in 2006 when the shares began to collapse. Since then he has sold most of them, but because he bought some of the shares so cheaply six years before, Muhlenkamp recorded capital gains.

Muhlenkamp is steering well away from housing these days. Instead he is focusing on well-managed industrial companies including Boeing and Caterpillar, and computer companies such as Cisco and IBM. He figures such companies should hold up during the hard times and roar ahead when the economy revives. You may want to be hanging on to his lapels when it does.


These former stars have fallen out of favor from time to time, only to return to greatness.

Fund Ticker Category Three-Year Return Five-Year Return % Category Five-Year Return Rank
Legg Mason Value LMUTX large blend -3.4 2.8% 99%
Muhlenkamp MUHLX large value -1.0 8.2 83
Oakmark Select OAKLX large blend 0.60 4.7 98
Weitz Partners Value WPVLX large value 1.1 5.6 97
Source: Morningstar. Returns through 5/31/08.
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