Dear friends,

Welcome to 2010!  Around the world the New Year holiday brings a wealth of customs designed to bring prosperity to the celebrants.  In cities from Sao Paulo to La Paz, folks wear bright yellow underpants in hopes of golden fortunes.  Citizens of the Philippines eat round foods and wear clothes with polka dots, both reminiscent of the shape of money.  Spaniards try to gobble 12 grapes in the time that it takes the clock to strike 12:00; after a quick round of Heimlich hugs, survivors sip sparkling cava wine and toast their prosperity. In Pittsburgh, we placed a new dime – face up – over the entry door so that we’d always have money coming in the house.

Most of the writers who managed to avoid the temptation of constructing “turkey lists” in honor of Thanksgiving have succumbed to the need to celebrate the new decade by whacking away at the mutual fund industry.  A bunch of the whacks are well-deserved and some are even witty.  Morningstar has been having a sort of “dumb-off,” dueling lists of the dumbest fund launches from the dumbest decade in investing – the 90s – with the dumbest launches from its most dismal decade, the current one.  Chuck Jaffe’s Lump of Coal Awards for naughty funds (I thought the second installment, on December 20^th, was particularly well done) earned him recognition as a major force in fund marketing.  Given his sharp wit and an estimated 20 million readers each week, MutualFundWire.com places him at 32 on their list of “Most Influential People in Fund Distribution.” I suspect that if John Rekenthaler, Morningstar’s ur-curmudgeon and author of Bad Investment Ideas for 2010, decided to, he would also be a force on the list.  Such commentary is fun to read and, generally, well-deserved by an industry that spends rather more time alternating between butt-covering and marketing than I’d like.  And so I present . . .

A Cheer or Two for the Fund Industry

That said, I have to give the fund industry as a whole credit.  I’ve recently reviewed the strategies and records of all funds first launched in 2008.  I’m focusing on ’08 because the ’09 funds don’t even have standardized year-to-date performance records, much less longer returns.  And the fund industry acted pretty darn responsibly, occasionally brilliantly, in its’08 launches.  Among the highlights:

· In 2008, they launched 18 new diversified emerging markets stock funds: a bold move in the face of the group’s 55% decline that year and a prescient one given the 72% rebound so far this year. That group was paced in 2009 by eight funds which posted returns of more than 100%. Those include the various share classes of Goldman Sachs BRIC, Dunham Emerging Markets Stock, Lazard Developing Markets Equity, Wasatch Emerging Markets Small Cap (WAESX), T. Rowe Price Emerging Europe and Mediterranean (TREMX), Van Eck Emerging Markets and two leveraged funds, Direxion Monthly Emerging Markets Bull 2X and Pro-Funds Ultra Emerging Markets.

· At the other end of the emerging markets spectrum, folks who knew that China’s markets were wildly overvalued had the opportunity to bet against them via ProFunds UltraShort China (UHPIX).  The fund, since inception in February 08, has managed to turn $10,000 into $2600 (an accomplishment that used to require Garrett van Wagoner’s involvement), while losing 74% so far this year.  I don’t know why, but it appears that the entire management team was replaced on 12/01/09.

In general, the industry in 2008 stressed themes of globalization and flexibility.  Among the most popular categories for new funds were large cap international (28 new funds in 2008), global equities (37 funds) and flexible “world allocation” portfolios (20 mostly overpriced, new funds).  There were 68 new target-date funds and 27 large cap core domestic funds.  The mutual fund industry largely avoided the most brainless impulses which have seized the ETF industry (think: OOK, the all-Oklahoma ETF).  The most notable exception is the mostly idiotic Congressional Effect Fund (CEFFX), which goes entirely to cash whenever Congress is in session.  That strategy has allowed it to generate a 3.9% YTD loss with a 400% annual turnover. 

For the class of ‘09, the top launches include 14 world stock funds, 11 long-short funds, and seven world allocation ones.

Okay, perhaps a Third Cheer as a Veteran Manager Returns to the Field

Have you ever wondered what it would be like to win The Jackpot?  The Big One.  The one that pays tens of millions?  Mike Fasciano knows and, based on his experience, you might want to steer clear of the experience.   I’ve followed Mike’s career for 15 years now – ever since the days when I maintained “The List of Funds for Small Investors” for the old Brill/MFI site.  It was a collection of good no-load funds that an investor with fifty bucks and a bit of discipline could get into.  Early on, something called “Fasciano Fund” (FASCX) became a centerpiece of the “small core” fund grouping.  Tiny but mighty, it posted a series of strong, steady performances.  The December relaunch of Fasciano’s fund gave me an excuse to call and speak with him at his Chicago office. 

I’ll divide the story into four sections.

Act One: Small but Mighty.  Fasciano launched his fund in August 1987 with a million dollars raised by friends and family.  His plan was to invest in small companies that shared several important characteristics: they were well-managed, they generated substantial free cash flow and they avoided going deeply into debt.  That combination meant that the companies could finance their own growth with their own money –- which cuts way back on the silly empire-building that occurs when you’re using someone else’s money -- and it decoupled the firms’ fate from the whims of banks and bonds.  The fund grew slowly and steadily over its first decade, posting consistently strong returns with consistently below-market risks.  By 1997, the fund held a modest $56 million in assets.  And then he won the damned lottery.

Act Two: The Perils of Prosperity.   Leah Modigliani, strategist at Morgan Stanley, is the co-creator (with her Nobel prize-winning grandfather) of the M-squared metric, which purportedly allows for more accurate assessment of risk-adjusted investment performance.  In late 1998, she completed a study of 82 small cap funds.  That study, which was picked up by The Wall Street Journal, named Fasciano Fund as the decade’s best small cap fund.  Modigliani found that Fasciano Fund produced an average return of 17.6% per year over the previous ten years, compared with 11.2% for the Russell 2000 Index.  Even without the risk adjustment, Fasciano outpaced 95% of his peers over the decade.  Two months later, Money magazine published “Six Funds You Need Now,” which concluded “few managers have been more adept at weighing risk and reward than Michael Fasciano.”

All of which opened the floodgates.  Mr. Fasciano reports that by mid 1999 he had $450 million under management.  And that half of that money then “left as fast as it came.”  That rush in and out corresponded with a market increasingly frothy and hostile to conservative investing.  Fasciano had friends at Neuberger-Berman, then a storied investment advisor and no-load fund firm founded in the 1930s.  It was, he reports, “a place with a wonderful culture and history” where the legendary Roy Neuberger still dropped by from time to time. 

In March 2001, he became an employee of Neuberger, and Fasciano Fund became Neuberger-Berman Fasciano.  That happy partnership was disrupted by two developments that no one could foresee:

• “Careful” stopped working as well as it had.  Fasciano’s discipline led him to companies that did not borrow wildly, did not attract venture capitalists and did not celebrate debt.  The easy availability of money in the 2000s made that discipline (temporarily) irrelevant and the fund lagged its peers and benchmark.  At the same time, it did maintain the consistently low levels of risk which were the hallmark of its first decade.

• Lehman Brothers bought Neuberger. Supported by the same debt-happy culture that affected small cap investing, Lehman acquired Neuberger in 2003, bringing with it sales loads and a trader’s mindset.  Funds kept flowing in even as Lehman’s own finances, driven by its earlier embrace of sub-prime mortgages, deterioriated.  In March 2008, Lehman ordered a new set of expense reductions and a wave of layoffs – 10% of the Neuberger workforce, and more than 1,200 across its empire.  Despite a top percentile performance in early 2008 and a $1.0 billion portfolio, Mr. Fasciano was “right-sized” with hundreds of his colleagues.  By July, rumors were floating that Lehman was in line to be purchased by South Korean investors.  By August, NB-Fasciano was merged into NB Genesis amidst rumors that Lehman was trying to sell Neuberger to raise cash.  A month later, Lehman itself filed for bankruptcy.

Act Three: Renaissance. On December 22, 2009, Mike returned to the field with the launch of Aston/Fasciano Small Cap (AFASX).  He counted on the Aston organization to provide him with essential sales and back office support, so that he could concentrate on the portfolio itself.  Aston’s recent acquisition by AMG – the Affiliated Managers Group – buoyed his spirit still further, since AMG has a great record of nurturing and supporting its affiliated fund families (think “Third Avenue Value”) and has the financial heft to make important contributions to the funds. 

And so he begins again, “rebuilding relationships with individual investors” and “sticking with the discipline” of buying the stocks of well-managed, fiscally-responsible companies in pursuit of “consistently good” – if rarely spectacular – results for the folks who have entrusted their investments to him.  In some ways, he’s a million miles away from the 1987 start-up with its 20 investors.  In some ways, he’s come home again.

Life is, indeed, a work in progress. 

The Old Guys Rejoice

Perhaps in anticipation of Mike Fasciano’s return, a number of his compatriots -- guys who have been at this for 20 years or more – posted very solid performances in 2009.

• Ron Muhlenkamp, manager of the eponymous Muhlenkamp Fund (MUHLX) earned 33% for his investors, a top 14% finish among midcap-value funds in 2009 after four dreadful years.
  
  
• Bill Nygren, once given up for (brain-) dead, led Oakmark Select (OAKLX) to a 53% gain and a top 3% performance compared to other large core funds.  His turnaround began earlier with Oakmark (OAKMX), which had strong performances in both ’08 and ’09 and now extends to Oakmark Global Select (OAKWX), which FundAlarm profiled most recently a year ago.
  
  
• James D. Oelschlager’s White Oak Growth (WOGSX), the most renowned fund of the 1990s for its low turnover, high return style, pounded out a near 60% return to place it among the top 3% of large growth funds.  Its last performance (that splendid top-2% finish in 2002) was, sadly, followed by consecutive bottom 1% finishes.

Funds that Make Me Go “Hmmmmm”

I had the opportunity to correspond with USA Today’s John Waggoner, as he was preparing his December 10^th column on new funds worth dodging and those worth considering.  In the latter category, he places Royce Partners (RPTRX) and Turner Spectrum (TSPCX).  The former follows Royce’s recent pattern of extending their traditionally micro- to small-cap portfolios to cover larger and international stocks.  The latter mixes six different investment sleeves (long-short, market neutral, “select opportunities” and three global sectors) into an intriguing mish-mash.  I’ve never been a great fan of the Turner funds (a bit too gung-ho for my tastes), but they have had some splendid years.

As I thought about funds that Mr. Waggoner might consider, I concluded that I wasn’t happy creating a “best funds” list.  Instead, I thought about the funds that have demanded the greatest fraction of my attention; funds that I kept coming back to as the year progressed.

In general, funds merit attention either because they're run by great people or because they embody great ideas.  It would be really nice to find one that did both, but that's extraordinarily rare -- "great idea" funds are often creative responses to an emerging challenge or opportunity and they seem often to be the province of managers who haven't spent a decade or more perfecting some particular discipline.

My shortlist of "great manager" domestic funds:

• GRT Value (GRTVX) -- two of the best managers in recent history, plus one really solid manager -- Fraser, Kluiber, and Krochuk -- have joined forces to offer this reasonably-priced, low-minimum stock fund.  At last report it had drawn less $3 million in its first half year, and a fair chunk of that is the managers' seed money.

  GRT strikes me as a remarkably strong bet.  Three other funds are really, really intriguing but perhaps not in the same class:

• Walthausen Small Cap Value (WSCVX) -- neither Mr. Walthausen nor his former fund, Paradigm Value, are household names.  That said, he managed $1.3 billion for Paradigm and his fund kicked the snot out of most of his competitors over the four years he ran it.   His low profile and relatively short tenure at Paradigm Value (about four years) and here (22 months) make me rather more curious than passionate (yet).

• Akre Focus (AKREX) -- everyone's darling, but I'm more curious than convinced.  The departure of Mr. Akre's analysts, and their subsequent remarks that suggest that Mr. A. might have been something less than the be-all and end-all of the fund, suggests a bit more investigation is in order.

• Aston/Fasciano Small Cap (AFASX) – as I note above, Fasciano Fund had the best risk-adjusted return of any mutual fund in existence over the first decade of its existence (roughly '88 - '98), before a tsunami of incoming cash caused it to wobble badly.  Both Mr. Fasciano and his strategy come across as so sensible that you’ve got to cheer for his prospects.

The shortlist of "great manager" international funds would be Scout International Discovery (an all-cap fund from a great large cap manager), Amana Developing World (Mr. Kaiser has performed brilliantly with every other fund he's offered) and Causeway International Opportunity (a simple marriage of the other two, very solid Causeway funds).

My shortlist of "great idea" funds is topped by:

• RiverNorth Core Opportunity (RNCOX) -- as far as I can tell, a truly one-of-a-kind portfolio that combines a tactical asset allocation strategy with the opportunity to get arbitrage gains from the inefficient pricing of closed-end funds.  The more I studied the fund, the cooler it seemed.

• T. Rowe Price Strategic Income (PRSNX) -- offers a nice alternative for investors who know that a traditional income fund will leave them far short of their goals and a traditional equity fund that will leave them huddled in the corner, shivering with fright.  Fidelity's Strategic Income fund (FSICX) is probably better, but Price has a lower minimum and a long track record for getting things right.  I suspect that Third Avenue Focused Credit may appeal to that same niche, and Third Avenue is another one of those wonderfully disciplined, "get it consistently right" sort of firms.

• T. Rowe Price Global Infrastructure, due for launch in January 2010, will warrant careful attention.  Price is (a) cautious, (b) cautious about new fund launches, and (c) particularly cautious around the temptation to launch trendy new funds.  That said, they’ve had great success with other focused fund launches, from Media & Telecomm and Health Sciences to Global Technology.

• TIAA-CREF Lifecycle Index funds -- a straightforward, sensible idea: abandon active security selection, combine very low cost index funds (0.20%) and a slowly-evolving portfolio.  The red flag, of course, is that I don't particularly trust TIAA-CREF despite the fact that much of my retirement is hostage to them.  A slightly older set of funds with many of the same advantages are the AARP funds.  Nothing fancy: very low investment minimum ($25!), very low expenses (0.24%), and a very sensible, straightforward portfolio -- US index, international index, bond index, go to bed.  Just got five-star recognition from Morningstar and still haven't attracted serious money.

The Best New Mutual Funds of 2009

Morningstar’s director of mutual fund research, Russel Kinnel, decries the fact that “[m]ost of the funds launched this year are forgettable ‘me too’ funds,” but found “a handful are worthy of your attention.”  He highlighted those as “the best new mutual funds of 2009” (11/06/09):

His first nominee is Akre Focus (AKREX) – the superstar manager of FBR Focus (FBRVX) sets up his own fund, while three of his top analysts first join him then decide to remain loyal to FBRVX’s shareholders.  FBRVX has been a spectacularly streaky fund.  Here, for example, are its performance rankings within its Morningstar peer groups:

Here’s the quick translation: in ’04 it finished in the top 1% of similar funds.  A year later, in the bottom 20%. Then the top 1%, followed by the bottom 8%.  Like CGM Focus, FBR Focus shareholders have had a tough time sticking out the rough ride.  As a result, shareholders have seen – per Morningstar’s calculation – barely half of the fund’s nominal, long-term returns.

So far, Mr. Akre appears to have found virtually nothing to invest in.  He’s released the names of five stocks that he owns – three from FBRVX’s top five – but the fund has risen in value only 2% in the four months since inception (among the worst performers among all stock funds) and often has no change in net asset value from one day to the next. 

Despite the loss of his senior staff – his own hand-picked crew from Akre Management – and the inconsistency in performance, the arrival of AKREX has been treated as something between a coronation and an anointing.  Within weeks of its launch (10/15/09), Kiplinger’s booted FBR Focus from its Kiplinger’s 25 Best Funds list in favor of AKREX, and Morningstar declared it a fund to own right off the bat” (12/18/09).

For the benefit of readers who find Morningstar’s endorsement too subtle, a fairly aggressive advertisement for Akre Focus pops up each time Morningstar’s profile of FBR Focus is called up:

Mr. Kinnel’s other nominees for the best new funds of 2009 are:

·        American Funds International Growth & Income (IGAAX) – team-managed, slightly value-tilted sibling to EuroPacific Growth

·        Hotchkis & Wiley High Yield (HWHAX) – two talented high yield guys from PIMCO (Kennedy and Hudoff) jumped ship to launch this fund.

·        PIMCO Global Advantage Strategy Bond (PGSDX) -- Mohammad El-Erian’s new fund, which will allocate its global debt investments on the size of a country’s economy rather than on the amount of debt it issues.  Ideally, that means more investment in larger, healthy economies. 

·        Third Avenue Focused Credit Investor (TFCVX) – “one of the most interesting funds launched this year” – will invest in the debt of companies in deep trouble.  Third Avenue has always fished in such waters; the question, as Mr. Kinnel points out, is whether they can find 50 or 60 good investments in such places.

·        Tweedy Browne Global Value II--Currency Unhedged (TBCUX) – the Tweedy Browne folks have always hedged their currency exposure, which means that their funds’ returns are not directly affected by the rise or decline of the dollar relative to other currencies.  They believe that, in the long term, such fluctuations cancel out and, in the short term, lead to undesirable volatility.  Tweedy’s own professionals sound distinctly unenthused about the necessity for the fund:

“By establishing the Unhedged Global Value Fund, we are acknowledging that many investors may view exposure to foreign currency as another form of diversification when investing outside the U.S., and/or may have strong opinions regarding the future direction of the U.S. dollar. We are simply offering our investors a choice of how they want currency treated in the management of a portion of their international assets. In the words of one of our founders, Howard Browne, “Some like chocolate, some like vanilla.”

·        Vanguard FTSE All World Ex-US Small Cap Index (VFSVX) – an international small cap index fund, albeit one which has noticeably higher expenses than Vanguard’s actively-managed international small cap fund, International Explorer (VINEX).

Undoubtedly the Worst Best Fund Ever

It’s not surprising that Forbes has announced that CGM Focus (CGMFX) wins the award for the Best Mutual Fund of the Decade.  The Boston Globe declared Kenneth “The Mad Bomber” Heebner “The Decade’s Best” for a record that “still stands atop all competitors.” And SmartMoney anointed him “the real Hero of the Zeroes”

Oh, spare me.  With due respect to its venerable manager, the fund may also earn the distinction for the worst best fund ever.  The $3.3 billion dollar fund has returned 18.8% annually over the past decade.  The Total Stock Market Index less than nothing for the same period: negative 0.05% annually for a decade (through 12/24/09). 

At first glance, the fund has earned its kudos: it can go anywhere – domestic or foreign, equity or debt, long or short, large cap or micro – and does.  Morningstar classified it, based on its portfolio contents, as small, midcap and large cap in consecutive years.  It correlates with no index.  Both the manager and his business partner have over $1 million invested in the fund.

But none of us can afford to live in – or invest in – the world of “first glances.”  And anything past a “first glance” might leave you just a bit seasick.  Mr. Heebner invests like a whirling dervish.  His annual portfolio turnover sometimes tops 500% and almost always tops 250%.  His fund’s standard deviation – a standard measure of volatility -- is 32.2 and he’s lost as much in a single quarter – 37% -- as most funds lost over the course of the worst year for the market in decades. 

There was a little girl who had a little curl... Right in the middle of her forehead; when she was good, whe was very, very good... And when she was bad she was horrid --Mother Goose

There once was a fund guy named Ken Who seemed the smartest of men. Streaking like a comet His fund made me vomit, Now I shout, "Let's do it again!" --Anonymous

Morningstar calculates “investor returns” for many funds, which can differ greatly from the fund’s nominal returns.  The logic is simple: people tend to invest in funds that have had a brilliant run and flee from funds that are crashing.  As a result, investors tend to commit their capital at the worst possible moment: they buy high, and sell low.  And the more a fund is given to spectacular highs and abyssal lows, the more folks lose.

In the case of CGM Focus, those losses have been spectacular.  By Morningstar’s calculation, Mr. Heebner’s investors have lost an average of 11% a year over the same decade that the fund earned nearly 19%. 

What kind of fund loses 11% annually for a decade? At the risk of mixing apples and oranges just a bit, only a dozen or so funds have pulled off a losing streak like that: Berkshire Focus (BFOCX), three of the former Van Wagoner (now Embarcadero) funds, Frontier Microcap (FEFPX), and some sector and leveraged sector funds. 

This isn’t a case of asking “where are the customers’ yachts?” so much as “where is the investors’ Thorazine?”

Hot Competition: Fidelity’s Worst Fund

With $1.35 trillion and a cool 492 individual funds under management, it’s inevitable that Fidelity will come up with a stinkeroo or two.  What’s surprising is the rich and diverse array of alarming Fidelity funds.  Here are my two contenders for Fido’s most dismal dogs.

Domestic bowser: Fidelity Growth & Income (FGRIX).  FGRIX’s great strength is its consistency.  It’s been bad year after year, and manager after manager.  It was bad under Steve Kaye, who was replaced in 2005 by Tim Cohen.  Morningstar thought the fund promised to be “a bolder, better offering under its new skipper.”  It wasn’t.  Or, at least, it wasn’t better.  Nor has Cohen’s replacement, in early 2009, by James Catudal materially improved things.  This dollar fund has finished in the bottom 1% of large-core funds for the trailing 3- and 5-year periods and the bottom 4% -- with an annualized 3.9% loss -- over the last decade.  It qualifies as a “most alarming three-alarm fund” at FundAlarm, combining low returns which high risk.  From ’05 – ’09, the fund collapsed from $31 billion in assets to under $6 billion.  The fact of a smaller portfolio and returns that are merely weak – it trails 77% of its peers year-to-date -- qualifies as good news here.

International bowser: Fidelity Pacific Basin (FPBFX).  After three manager changes in three years (’03, ’04, ’05), Dale Nicholls has settled in and completed his fifth year with the fund.  Compared to Growth & Income, this isn’t a bad fund.  Compared to almost anything else, it is.  The problem isn’t horrid returns, since Mr. Nicholls performance has been bad (a bottom-third performance over his five years here) rather than eye-poppingly horrid.  No, this incredibly streaky fund warrants attention now because it’s on its biennial hot streak: in 2009, the fund returned 57%, placing it in the top 1% of all Asia-Pacific funds.  My favorite Asia fund, Matthews Asian Growth & Income (MACSX), by comparison, has returned a “mere” 40% and is in the bottom 3% of the peer group.  But 2010 is a new year and, if history is a guide, Pacific Basin will draw in lots of money and then slap its new investors upside the head.  Here’s the pattern since Mr. Nicholls arrival: top third (2005, his first full year), bottom 10% in 2006, top 10% in 2007, bottom 1% in 2008, and top 1% in 2009.  So far, Pacific Basin has profited in frothy markets and has been devastated by bad ones (down 68% during the downturn between late ’07 and early ’09). 

I’d be curious to know: what do you think qualifies as the worst fund in biggest families?  Is Vanguard Growth & Income (BQNPX) with its solid “bottom rung” finishes as bad as it gets?  Any thoughts on retirement giant TIAA-CREF’s Real Estate Securities (TCREX) fund?  Franklin-Templeton’s relatively new Mid Cap Value (FMVAX) is young, small, nimble … and consistently less-than-mediocre.  Should American Funds Income Fund of America (with 16 different share classes in all) deserve special sniping because of its $62 billion girth, which makes sub-standard returns in four of the past five years particularly painful?  Is Leuthold Select Equities (LSEQX), whose badly underperforming portfolio lies inside other Leuthold funds, the firm’s Achilles heel?  If you got nominees, let us know or – better yet – share your insights and frustration on FundAlarm’s incredibly vibrant discussion board!

So, what should you do for 2010?

That’s the question many are asking, and the answers are spewing from dozens of keyboards. Here’s my synopsis of the recommendations from four highly-visible sources:

“Make Money in 2010,” Money magazine, December 2009

Don’t hold your breath waiting for gains much beyond 6% in either stocks or bonds for 2010.  P/Es are quite high by historic standards and anticipated earnings growth won’t support more than a few percent gain.  The key to surviving is to go for high quality, in both stocks and bonds.

FMI Large Cap (FMIHX) – they go for undervalued large companies with sustainable economic advantages and strong returns on invested capital.  FundAlarm’s profile of the fund is here.

Jensen (JENSX) – pursues much the same strategy as Muhlenkamp, which is to say investing in firms with high return on equity and low P/Es.

T. Rowe Price New Era (PRNEX) – a commodities-oriented fund crafted for the “new (high-inflation) era” of the 1970s.

FPA New Income (FPINX) – a very cautious bond fund (currently 25% in cash) with a fine, pessimistic manager.

iShares Barclays TIPS Bond (TIP)

Templeton Global Bond (TPINX) – a global fund which focuses on government debt in emerging and developed markets.  Morningstar just elevated it to “Analyst Pick.”

“Where to Invest 2010,” Smart Money , January 2010.

It’s hard to imagine a more useless article for the average investor.  They boldly announce “no one knows which way the market is headed,” and so refuse to advise you where to invest 2010.  Instead, they assume that you’ll somehow have a more profound insight than the massive Dow-Jones conglomerate can gather and offer a handful of picks for each of four scenarios: economic decline, economic stasis, economic recovery and crash.  None of the first three assume that you’d want to invest in anything other than domestic common stocks.  Their bold bond picks for scenario four:

T. Rowe Price Short-Term Bond (PRWBX)

Vanguard GNMA (VFIIX)

iPath S&P 500 VIX Short-Term Futures ETN (VXX)

An accompanying article which features interviews with four fund managers (including Amit Wadhwaney of Third Avenue International and Jeff Cardon of Wasatch Small Cap Growth) does conclude with a series of warnings that our fiscal profligacy is coming at a price and that the U.S. might not be the place to invest over the next several years.

 Steven Goldberg, “The 5 Best Stock Funds for 2010,” Kiplinger.com December 18, 2009

Kiplinger’s assumes that “A doozy of a recession may be behind us, but that doesn’t mean stocks are out of the woods. Creeping inflation, high unemployment, sluggish consumer demand and still-unsettled credit markets are only a few of the concerns that remain. Just in case this recovery hits a bump or two, it’s smart to own stocks with good shock absorbers -- strong balance sheets, good cash flow and dominant positions in their markets. Generous dividends don’t hurt, either.”  Their fund recommendations “Focus on funds that buy large companies with above-average growth rates. And don’t shy from emerging markets.”

Primecap Odyssey Growth (POGRX) clones the successful, closed Primecap Core strategy.

Fairholme (FAIRX) has committed few errors since its inception ten years ago.

T. Rowe Price Small-Cap Value (PRSVX “will shine if the market proves me wrong and pushes up prices of small-company stocks.”

T. Rowe Price Emerging Markets Stock (PRMSX) is up 83% and “New manager Gonzalo Pangaro is doing a superb job, but the real credit goes to his large and experienced team.”

Masters’ Select International (MSILX) splits its portfolio among a half-dozen outside managers selected for their specialized abilities (e.g., in emerging markets) by Advisor Litman/Gregory.

The caveat here is that Mr. Goldberg’s 2009 picks didn’t exactly heap glory upon themselves.  He chose two funds that had very poor years -- Bridgeway Aggressive Investors 2 (BRAIX – up 30% but among the worst quarter of mid-cap growth funds) and  CGM Focus (CGMFX – up 9%, worst 1% of funds), one fund that had a decent year -- Vanguard Primecap Core (VPCCX – up 37%, modestly above average, and two with first-rate years -- Loomis Sayles Bond (LSBRX – up 36%, near the top) and T. Rowe Price Emerging Markets (PRMSX – up 83%, top 15% of its peer group).  Two bad, one good, two very good isn’t quite “the best funds for 2009” but we can hope that 2010 looks a bit better.

Briefly Noted:

Number of Fidelity mutual funds: 279. 

Number of Fidelity funds recommended by Morningstar as “Analyst Picks”: 13. 

Number of Fidelity “picks” that are bond funds: 11.

Number of actively-managed domestic equity funds: 82

Number of those funds that qualify as “picks”: 0.

Amount of money in those “unpicked” domestic funds: $378,000,000,000.

Here’s Fidelity’s description of itself: “Once known primarily as a mutual fund company, Fidelity has adapted and evolved over the years to meet the changing needs of its customers.”

Morningstar shows 132 funds launched since Jan. 1 2009.  If you count all of the share classes separately, the total goes to 899.  Right, on average, every new fund comes with 6.8 share classes: retail no-load, A, B, C, institutional, insurance-wrapper only, retirement only, which tells you that the industry is incredibly desperate to market their new offerings.   That compares with 409 funds launched in 2008 with an average of just 5.2 share classes each.  In the last year, marketers have found 1.6 new ways to package every fund they offer.  That certainly sounds like a good use of our (steadily rising) expense ratios!

In Closing . . .

Whether you began your year flying kites with the Koreans, burning effigies of fund managers with the Panamanians or swinging flaming pots with the Scots, Roy and I are delighted that you’ve chosen to spend a bit of your new year with FundAlarm.  We wish you great joy, good sleep and modest wealth in the months and years ahead.

And do remember to keep those cards and letters coming. Historically, Roy tells me that January has always been the best month of the year for cash support of FundAlarm -- perhaps something to do with New Year's resolutions, or just generally getting the year off on the right foot. Whatever the reason, should you be so inclined, you can find a range of options for supporting FundAlarm here.

As ever,

David