Top mutual funds of 2012 rebound from poor 2011

Published on NewsOK Modified: January 3, 2013 at 4:59 pm •  Published: January 3, 2013
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BOSTON (AP) — The stock market posted impressive returns last year, even with the presidential election and the resulting political gridlock. It was a welcome change from 2011, when the market rose only slightly.

The two top-performing stock mutual funds of last year posted returns greater than 35 percent, more than twice the gain of the broader market. But go back further than last year and their recent strength doesn't look as impressive. Both funds performed dismally in 2011.

For long-term investors, it's a reminder of the importance of patience. Just as it's rare for fund managers to pick the top-performing stocks year after year, it's unusual for them to repeatedly post disappointing numbers. The market shifts, and many of the worst performers in a given year fare much better the next. The trick is to find funds that outperform a majority of peers more often than not, and stick with them.

In 2012, the Standard & Poor's 500 index returned 16 percent, far better than the previous year's 2 percent rise. Stocks surged despite modest economic growth and a slowdown in corporate earnings. There were plenty of risks: the European debt crisis, slower Chinese economic growth and the partisan feud over restoring this nation's shaky fiscal health. Those worries were offset by a rebounding housing market and continued efforts by the Federal Reserve to stimulate the economy.

Below is a look at three of the top-performing stock funds of 2012, in order of their returns:

MILLER BACK ON TOP

Bill Miller has a reputation to live up to. He became famous for beating the S&P 500 for 15 straight years through 2005. But his Legg Mason Capital Management Value Trust fund began faltering in 2006, and Miller left that fund last April.

He remains manager of Legg Mason Capital Management Opportunity (LMOPX), assisted by Samantha McLemore. The fund posted a 39.6 percent return last year. That's the top result among diversified U.S. stock funds with at least $100 million in assets, according to Morningstar.

It's a stark contrast to 2011 when the fund dropped nearly 35 percent. That was the biggest loss in Morningstar's mid-cap value stock fund category.

Performance turned around in 2012 because a handful of homebuilder stocks had breakout years. PulteGroup, the biggest holding in the $1 billion fund, shot up 188 percent and was the top stock in the S&P 500 last year. A couple other homebuilders in the fund's top 10 holdings, KB Home and Lennar, jumped 135 percent and 97 percent, respectively.

Those strong gains reflect what Miller and McLemore call a virtuous cycle: An improved housing market fuels increased consumer spending and a stronger economy, leading home prices to climb even further.

"While we were early to invest in housing, the recovery has clearly begun, helping the portfolio in 2012," McElmore said. "Judging from history, we are in the early stages of a long, enduring improvement, which should have positive implications for the economy and our holdings."

BERKOWITZ REBOUNDS

Bruce Berkowitz' Fairholme Fund (FAIRX) rose 35.8 percent, the top result among all large-cap value stock funds.