Now that 2009 is in the books, it’s possible to sit back and take stock of that roller-coaster year for investors. After 2008’s disaster, it wasn’t tough for the markets to look better last year, and all the major indexes posted substantial gains. The S&P 500 Index jumped 23.5% for the year, the Dow Jones Industrial Average gained 18.8%, and the Nasdaq Composite was up 43.9%.
As with all bull markets, certain investments did better than others in 2009. Some of the biggest gains came from risky assets such as emerging markets, gold, and micro-cap stocks. Of the 12 Morningstar stock sectors, the best performers last year were hardware (including such big gainers as Apple (AAPL) and semiconductor stocks), industrial materials (including commodity stocks such as Freeport-McMoRan Copper & Gold (FCX)), and software (including big Indian outsourcers such as Wipro (WIT)). The average stock in each of these sectors gained more than 60% in 2009, with many big names, including all three stocks mentioned above, gaining more than 100%.
But it wasn’t just these hot sectors that posted big gains last year. The rally was actually pretty broad, with even the worst-performing sector, utilities, up nearly 20%. That’s a contrast to the bull market of a decade ago, when anybody who didn’t own technology and telecom stocks got left in the dust. To illustrate that point, we looked at funds in the nine categories of the Morningstar Style Box with at least $100 million in assets, and we ranked them by the percentage of their stock portfolios in the three hottest sectors noted above (hardware, industrial materials, and software).
Of the handful of funds with less than 10% of their stock portfolios in those three sectors combined, several had bottom-quartile returns in 2009, such as Aston/River Road Small Mid-Cap (ARSMX) and Federated Strategic Value (SVAAX). Some, however, still managed to put together top-decile returns despite their lack of exposure to the market’s strongest sectors. The four funds highlighted here have some things in common: They’re concentrated funds with a value bent, and three are run by former Morningstar Managers of the Year. But they took very different paths to the success they achieved in 2009.
FPA Capital (FPPTX)
This fund was managed in 2009 by three-time Morningstar Manager of the Year Bob Rodriguez–who just started a one-year leave of absence–along with Rikard Ekstrand and Dennis Bryan, who now run it on a day-to-day basis. Rodriguez is a notoriously risk-averse manager who typically holds a lot of cash and follows a strict valuation discipline, which is why this fund has avoided technology stocks recently. However, Rodriguez and his comanagers are often willing to be heavily overweight in sectors where they see a lot of value. Energy stocks now make up more than half the portfolio after the managers went on a buying spree in late 2008 and early 2009, convinced that many of these stocks were trading for a fraction of their real value. That bet paid off in 2009, when energy stocks soared and this fund ranked near the top of the mid-cap value category.
Clipper (CFIMX)
This is another fund managed by bargain-hunters who aren’t afraid to let the portfolio get concentrated in a few sectors, namely Chris Davis and Ken Feinberg, who were Domestic-Stock Managers of the Year in 2005. Davis and Feinberg have long been fans of financial stocks in their other funds, including Selected American and Davis New York Venture, and since taking over this fund at the beginning of 2006, they’ve kept its financial stake even higher, at nearly half of assets. Disastrous returns by such big financial holdings as American International Group (AIG) and Merrill Lynch hurt the fund badly in 2007 and 2008, but it came roaring back in 2009 as large-cap financials rebounded strongly from their March lows, with top-five holding American Express (AXP) up 122% for the year.
Longleaf Partners Small-Cap (LLSCX)
Skippers Mason Hawkins and Staley Cates (who succeeded Davis and Feinberg as Domestic-Stock Managers of the Year in 2006) subscribe to a deep-value philosophy, only buying stocks trading at least 40% below their estimated intrinsic value. They don’t have any big sector weightings comparable to FPA Capital’s in energy or Clipper’s in financials, but they do have almost one fourth of this fund in telecom and media stocks, about five times as much as the average mid-cap value fund. Those sectors were beaten up badly in 2008 but bounced back very nicely last year. Such holdings as tw telecom (TWTC) and Discovery Communications (DISCK), both of which doubled in 2009, helped this fund land in the category’s top 7% for the year.
Appleseed (APPLX)
This fund is the newcomer of the bunch. It just launched in December 2006, but it has already put together an impressive record, ranking near the top of the mid-cap value category in both 2008 and 2009. The five-person management team will only buy stocks that pass its social screens, but otherwise the fund’s portfolio is extremely wide-ranging. Mega-caps such as Pfizer (PFE) rub shoulders with micro-caps such as John B. Sanfillipo & Son (JBSS), and about 20% of the portfolio is in cash and 15% is in gold (as of Nov. 30, 2009). The fund’s biggest current sector bets are in health-care and consumer goods, neither of which was a particularly strong category in 2009, but good stock picks and smart timing helped the fund gain 60% for the year. It’s not going to post such gains every year, and given the concentrated nature of the portfolio, it’s virtually certain to stumble at some point in the short term. That’s true of all these funds, but they’ve all excelled in the long term, and their success in 2009 shows how diverse this rally has been so far.
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