Value Funds Still a Good Investment
The bear market has clobbered funds of all kinds. In the third quarter of 2008, the average U.S. diversified stock fund lost 10%, according to fund tracker Lipper.
Among the most notable losers are funds that once ranked as stars. Many of the troubled funds specialize in value stocks—unloved issues selling at discounts. The best known of the value managers is Bill Miller of Legg Mason Value, who became prominent while outdoing the Standard & Poor's 500-stock index for 15 years in a row.
The streak ended in 2006, and then the fund began falling. Miller lagged behind 99% of his competitors for performance during the year ending in August. Other recent losers include Ron Muhlenkamp of Muhlenkamp Fund, Bill Nygren of Oakmark Select, and Wally Weitz of Weitz Partners Value.Seeing the poor results, investors are fleeing the value funds. The exodus could prove poorly timed, however. These funds still have top long-term records. There is good reason to believe that the former star managers will again enjoy brighter days. Instead of selling, investors should wait patiently for the rebound that is likely to come in the next year or two.
To appreciate the folly of selling now, consider Oakmark Select. During the past 10 years, the fund has returned 10.7% annually, outdoing 95% of its competitors and surpassing the S&P 500 by six percentage points. Based on that record, portfolio manager Bill Nygren ranks as one of the top managers anywhere. Plenty of investors, though, have lost confidence and sold shares in the past year. Assets in the fund dropped from $6.1 billion in 2005 to $2.9 billion now.
The withdrawals were triggered by big losses. During the past year, Nygren lost 20%, about five percentage points behind his average competitor. While the downturn has been painful, investors should not have been surprised. Nygren buys unloved stocks selling at discounts. Then he waits patiently for the shares to recover. Because he takes stocks that others hate, Nygren is often out of step with the markets. In the past, he has lagged competitors for a year or two—and then snapped back.