A little over a year ago, I discussed the issue of investing with superstar mutual fund managers. I mentioned Fairholme's Bruce Berkowitz and Fidelity Contrafund's Will Danoff in the article. As we are almost done with 2012, it's a good time to revisit this topic and those managers.
Bruce Berkowitz Fairholme (FAIRX). When we looked at this fund last October it was well on its way to a loss of 32.42 percent for the full year 2011. This placed the fund at the very bottom of Morningstar's Large Value peer group. Let's remember that Morningstar had voted Berkowitz as Domestic Equity Fund Manager of the Year in 2009 and as its Domestic Equity Fund Manager of the Decade.
Through October 31 of this year Fairholme has staged quite a turnaround. The fund has gained 36.67 percent and ranks in the very top percentile of its peer group.
This reminds me of something an instructor said a few years ago in a continuing education class. He postulated that for many actively managed equity funds that rank in the top 25 percent or better of their category over a ten year period, it would not be unusual for them to have spent three of those calendar years in the bottom 25 percent of their category.
In the case of Berkowitz, Fairholme ranks in the top 1 percent of its category for the trailing ten years and the top 13 percent for the trailing five year period. Its rank in the bottom 13 percent for the trailing three years is largely a function of its 2011 performance.
Moreover for the period 2002-2011, plus October of 2012 year-to-date, the fund ranked in the top 1 percent of its category three times, in the top 10 percent an additional four times, and in the bottom 10 percent twice.
I'm not recommending that you do or don't invest in Fariholme (I have no personal or client money with them). In deciding whether this is an appropriate investment for your portfolio it is important to understand how the fund invests and the potential risks involved.
Will Danoff Fidelity Contrafund (FCNTX). I cited Danoff as someone who has been able to maintain top-level, actively-managed performance over a long period of time. His track record is even more noteworthy given the level of assets he manages at Contrafund and a couple of similar portfolios.
The fund lost 0.14 percent in 2011, but this still placed Contrafund in the top 30 percent of Morningstar's Large Growth category. The fund has gained 13.89 percent year-to-date through October, placing it in the top third of its fund peer group. Over the ten years ended October 31, the fund has gained an average of 9.33 percent annually placing it in the top 8 percent of its category. This ranks in the top 25 percent and top 27 percent of its category for the trailing three and five years, respectively.
For the period 2002-2011 plus October year-to-date, the fund has placed in the category's bottom half only once (2009 when the fund gained over 29 percent). What makes this performance even more impressive is the fact that this fund has over $83 billion in assets and Danoff manages over $100 billion when a couple of other similar portfolios are included.
Again, I don't recommend investing or not investing in this fund all investors should evaluate this or any potential investment based on their own personal situation. I do have two retirement plan clients who use Fidelity and both had this fund in their investment line-ups when they hired me. I have not suggested that they replace this fund and have no current plans to do so.
Even the most successful mutual fund managers go through rough patches that can last several years. It can be tough to decide whether or not to stick with these managers. This analysis involves a number of factors.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. Read more about Roger here.
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