Funds bear examination during down years, too

We measure the years according to the Earth’s rotation around the sun, but that might not be the best way to gauge your mutual fund’s performance. Calendar years don’t tell us what kind of investment environment your fund has been facing.

Instead, consider reviewing how your fund has performed in not only up but also down markets. And as it happens, we now have handy recent examples of both kinds of stock markets to make comparisons.

The most recent bull market began Oct. 9, 2002, when the Standard & Poor’s 500 stock index hit a low of 777. The bulls ran exactly five years, until the S&P 500 hit 1565 on the same date in 2007. Since then, the market has been essentially sliding downhill.

Ideally, you want to own a fund that will beat the competition in both up markets and down. Not many do. What do they have in common?

•They almost never finish in the top of the quarterly — or even the yearly — rankings. Funds that shoot the lights out one year tend to shoot themselves in the foot eventually. Case in point: Van Wagoner Emerging Growth, up a scorching 291 percent in 1999. The fund plunged 65 percent in 2002.

“Our goal here is not to be No. 1 in a quarter but to be among the top half of our competitors,” says John Derrick, co-manager of U.S. Global All-American Equity Fund (ticker: GBTFX). His fund gained 129 percent during the bull phase of the market, compared with 101 percent for the S&P 500. For the bear phase, the fund fell 9.3 percent, versus a 15.7 percent loss for the S&P 500.

•They tend to keep an eye on price. Chris Davis and Ken Feinberg, managers of Davis New York Venture (NYVTX) favor steady earnings growth, but they hate to pay too much for a stock. Their eye for value has prevented the fund from being clobbered in downturns. Davis New York Venture scored a sizzling 140 percent gain during the bull market and fell only 10.2 percent during the stock market’s decline of the past six months.

•They like to dig deep into a company’s balance sheet. Mark Adelmann, co-manager of Westcore Blue Chip Fund (WTMVX), pays more attention to a company’s cash flow than its earnings. “Earnings are easier to manipulate,” Adelmann says. “We like to look at how management manages the capital they are given.” Westcore gained 124 percent in the bull market and fell just 9.7 percent in the bear market.

•They admit when they’re wrong. “Some managers fall in love with a stock and just keep riding it down,” says U.S. Global’s Derrick. He and his team use computer models to flag stocks they own that don’t seem likely to rally soon.

•Experience counts. Susan Byrne, manager of Gamco Westwood Equity (WEECX), has run the fund for more than 21 years. Eugene Sit, who manages Sit Large Cap Growth (SNIGX), has been at the helm since 1982. Both outperformed 75 percent of their peers in the most recent up and down markets.

Other large-company funds that have proved to be bull and bear champs:

•Pioneer Cullen Value (CVFCX), up 160 percent in the bull market and down only 6.9 percent for the past six months.

•American Funds Fundamental Investors (ANCFX), up 166 percent in the bull market, down 7.9 percent since October.

•TCW Equities (TGLVX), up 133 percent in the good times, down 9 percent in the bad.

If you’re going to hitch your investment fortunes to a good manager, make sure he or she is still running the fund. Oppenheimer Rising Dividends Fund scored well in both up and down markets. But current managers have been in place only since August.

Not all bull and bear markets are alike; the next bull may be entirely different from the last. But a fund that’s weathered both up and down markets would be a good bet for the next boom-and-bust cycle.