How Did the Biggest Funds of 10 Years Ago Fare?

In this article, we're going to focus on one category--large blend, the largest of our U.S. domestic-equity categories--to see how the largest funds in the category at the beginning of that span (for which we have published analyses) have fared, as well as evaluate our recommendations for those funds. (It's worth noting that we haven't had Analyst Picks for 10 years, but we have been making active recommendations in our analyses.) Why 10 years? We chose such a long period because it encompasses several very different market environments, including the frenetic tail end of the late 1990s' bull-market run-up, the bear market, and the ensuing equity rally that has been led by smaller, more-leveraged fare than the previous bull market. That makes for a more level playing field, in terms of returns, for different types of investing styles.

We think it's more useful to look at our recommendations based on fund size back at the start of the period, as opposed to the 10 largest funds now. The latter funds have all been successful over the prior decade--investors tend to flock to funds with good records--while the group from 1997 has since produced divergent results, which makes for a better test.

The Results
Of the 10 biggest large-blend funds back in 1997, six have outperformed the majority of their rivals since October 1997. We recommended five of those funds for purchase at that time. And while we didn't recommend the sixth-- Oppenheimer Main Street (NASDAQ: - )--we did turn positive on it in 1998, when a new, proven management team came aboard that included current lead skipper Nikos Monoyios (who succeeded his retired mentor, Charles Albers). That fund has since modestly outperformed its typical peer. The most successful of those six funds has been American Funds Fundamental Investors (NASDAQ: - ), which has outpaced more than 90% of its rivals. Other distinguished winners in this group include Davis NY Venture (NASDAQ: - ) and the currently struggling Oakmark Fund (NASDAQ: - ). We recommended the latter fund when it was run by Robert Sanborn, even as it struggled mightily in 1998 and 1999, and remained positive on it when Bill Nygren took the helm the following year. Finally, we are still recommending all six funds as of their most recent analyses.

What Happened to the Laggards?
The other four funds in that group of 10 have underperformed their typical large-blend rival since 1997. True, we did recommend all four funds at the time, based on their characteristics at that point. However, it's important to note that we weren't recommending these funds in perpetuity, and that we've changed our minds on some of them as their fundamentals have changed. For example, each of the four funds has since gone through manager changes, and we eventually stopped recommending two of them (and still don't). It could be argued that at least one of those funds, DWS Growth & Income (NASDAQ: - ), lost its manager at precisely the wrong time. Rob Hoffman employed a dividend-focused, value-oriented style that worked well for much of the 1990s, but was out of step with the growth-led rally of 1998 and 1999. (The fund also resided in the large-value category at that time.) He left the firm in October 1999, just five months before the start of the bear market, in which his fund almost surely would have thrived relative to both large-value and large-blend funds. (We pulled the plug on our recommendation about two years later.)

One underperformer we've continued to recommend is Fidelity Growth & Income (NASDAQ: - ), which was run by Steven Kaye from 1993-2005. Kaye amassed a fairly solid record through much of his tenure, but the conservatively positioned fund floundered in the post-bear-market rally beginning in 2003, and Tim Cohen replaced him in late 2005. Cohen's off to a rough start thus far; as a result, the fund has lagged about two thirds of its rivals over the past 10 years. Based on Cohen's impressive prior record at Fidelity Export & Multinational (NASDAQ: - ) and his sensible, counterpunching approach, we still recommend the fund. The worst performer of the bunch has been Neuberger Berman Guardian (NASDAQ: - ), which has since seen a number of manager changes and strategy tweaks. We started out recommending the fund, grew a bit more skeptical by 1999, then recommended the fund again as its once-aggressive approach was toned down. The fund has lagged more than 80% of its large-blend peers since late 1997, but its performance over the trailing five years--which more closely coincides with our recent history of recommending the fund--is quite good.

Corporate Culture Matters
What have we learned from this exercise? Well, we recommended all but one of those 10 largest funds in 1997, and all had solid records at that point. (We excluded one fund for which we didn't publish an analysis at the time-- Vanguard Institutional Equity (NASDAQ: - )--and another, AIM Premier Equity, that has been merged into another fund.) But the results of those funds underscore why we developed the Morningstar Stewardship Grades, and why the Corporate Culture section is the biggest factor in a fund's grade. Of the four actively managed winners, three are run by shops where we have consistently had confidence in their investing culture--American Funds, Davis, Oakmark and (to a lesser degree) Oppenheimer. Good managers tend to stick around at firms that have solid cultures. Indeed, the winners' shops earned one A and three Bs for corporate culture. So we had good fundamental reasons to recommend them. Turning to the underperformers, it's difficult to anticipate the types of manager and strategy changes that occurred at the funds that have since underperformed. But the broader story at most of those shops is somewhat spotty as well. DWS' (formerly Scudder), Morgan Stanley's, and Neuberger Berman's fund lineups have certainly been more hit and miss than the above firms, and Fidelity's funds have had performance and manager-turnover issues. These four shops, in contrast, earned two Bs, one C, and one D for corporate culture.

Greg Carlson does not own shares in any of the securities mentioned above.