Tuesday, March 3, 2009

WSJ: Can 2008's Lonely Mutual Fund Success Avoid Falling to Zero From Hero?

We have documented how mutual funds have had a rough year, and in fact rough decade [Feb 5: Mutual Funds have a Rough Decade] The "long only" "fully invested" "cash is trash" model works wonders in bull markets (most of 1983 to 1999) - not so good outside of that era. 2008 was especially brutal as even the masters of the universe in hedge fund world were (mostly) hammered as well.

One name that did well in 2008 was Tom Forester at Forester Value (FVALX) We highlighted this name in November [Nov 14, 2008: 1 Stock Mutual Fund is Positive in America... ok WAS Positive] The irony is he uses the same back office administrator I've been working with which caters to small funds - Forester was at $40M when we wrote the story in November and already has surged to $70M. Performance brings dinero - even if 0% is performance :) (remember 0% return is the new 40%)

The Wall Street Journal had an article late last week with some thoughts on where to from here
  • Thomas H. Forester somehow managed to be the only stock mutual fund manager among 8,200 peer diversified U.S. stock offerings to post a gain for 2008. Those funds had a 39% average loss, while his Forester Value fund ended the year with a small 0.4% gain.
  • Mr. Forester, 50 years old, is an unlikely hero. He has toiled in obscurity for most of his 20-year investment career. His $70 million fund is less than a tenth the size of the average U.S. stock fund. And one year it lagged behind the S&P 500 by nearly 30 points. His wife, Kaye, wanted him to fold it a year ago unless he could improve his results.
  • His success hasn't gone unnoticed. The fund has swelled $20 million in the past two months, while parts of the $9.6 trillion mutual-fund industry are battling record withdrawals. He recently visited Philadelphia and Long Island to meet brokers newly interested in selling the Forester fund. He made his first TV appearance in December.
  • Good luck to him. The mutual-fund industry is obsessed with one-year returns, and last year's winners can be this year's flameouts. "It's the nature of the business, you can go from hero to goat to hero again quite quickly," says Ryan Jacob.
  • And he should know. Mr. Jacob helped run Kinetics Internet fund, the nation's top performer in 1998. He famously returned 196% that year amid the dot-com bubble. His assets ballooned from $5 million in 1998 to more than $600 million in 1999. He then departed to start his own Jacob Internet fund. It took an 80% dive in 2000. It's down 6% on average for the past five years and has amassed just $25 million.
  • Mr. Forester, a boyish, softspoken man who wears jeans and fleece to work on cold winter days, is eager to prove the win was more a stroke of genius than a stroke of luck. But retaining the championship is a tall order. A lot of his success in 2008 came not from great stock picks but from taking large cash positions. Already, the positive return is slipping away. He's down 13% so far in 2009. (yo, we're beating him by 11%)
  • By 2007, "I was at the end of my rope," he says. His fund had barely attracted $2 million. He and a partner, Michael Ditzler, invested 40% of that personally. Mr. Forester and his wife were burning through their savings supporting their two children.... But his wife was annoyed. "I just kept asking myself, 'When is this going to happen?'" she says.
  • Sitting in their living room in October 2007, the two agreed Mr. Forester would close shop if he wasn't beating the S&P 500 by 10 points by March 2008. "I can't give up when everything is right on the threshold of the way I thought it would happen," he recalls telling his wife.
  • He was expecting a market crash, having monitored government data for years suggesting to him that housing prices were going to fall off a cliff. He dumped financials like Citigroup Inc. by March 2008. The bank has fallen more than 85% since then. He snapped up health-care stock Bristol-Myers Squibb Co., which rose 8% while he held it last year.
  • Forester Value beat the S&P 500 by 9.5 points through March, and that was good enough for Mrs. Forester. She agreed he should stick with the business. And she's glad she did. She and Mr. Forester often drive to get coffee together early in the morning and talk about the growing business. They've considered buying a sport utility vehicle to replace her old red van.
  • Oil stock EOG Resources Inc. rose 60% when he held it from January to May. Mr. Forester sold some shares by June. That helped him sidestep the commodities collapse last summer. He bought some Bank of America Corp. stock at $18 a share in July and sold the bulk at $30 in September. (It's now trading at about $5.)
  • By summer, his fund had hit No. 1. He then hoarded cash, salting away 30% of his assets in cash by September, and thus largely avoided the year-end crash. He also held on all year to McDonald's Corp. and Wal-Mart Stores Inc., the only two stocks in the Dow Jones Industrial Average with gains last year.
  • Mr. Forester has tried, in a rocky market, to keep his roll going. One day late in January, he sat in his office contemplating the situation. He was horrified by insurer Allstate Corp.'s bad earnings that week. The holding is "a pain in my side," he muttered. Another holding, manufacturer Textron Inc., tanked 32% that day after reporting a disappointing quarter.
Such a different life being an independent small fund rather than the Janus, Fidelity, Invesco et al world.

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