Best & Worst Mutual Funds of 2012

Despite grim economic news from China and Europe, as well as fiscal cliff fearmongering, mutual funds have had a pretty good run in 2012. Small-, mid- and mixed-cap growth funds delivered strong returns, and hot sectors like biotechnology soared.

While all bets are off if the U.S. fails to avert the fiscal cliff, rising inflation and slow economic growth in 2013, I think defensive sectors like healthcare could do well next year. Large-cap, value-oriented mutual funds like the Vanguard Health Care Fund (MUTF:VGHCX) are well diversified and could perform well with low volatility.

But before we get ahead of ourselves, let’s look back at some of the best (and worst) mutual funds of the past year. We screened funds with more than $100 million in assets, eliminating those with a minimum initial buy-in of $100,000 or more so we could focus on funds more accessible by regular retail investors. The data reflects year-to-date mutual fund performance, and top holdings are from the most recent available information:

#3 Best Mutual Fund: Artisan Global Opportunities Fund

YTD Return: +28.1%

Artisan Global Opportunities Fund (MUTF:ARTRX) is a mixed-cap growth fund that focuses on U.S. companies with a market cap of at least $3 billion, as well as non-U.S. company stocks and depositary receipts. ARTRX’s selection process focuses on security selection and capital allocation.

Top 3 Holdings:
1. Google
(NASDAQ:GOOG): 5.9% of assets
2. Monsanto (NYSE:MON): 5.1% of assets
3. Apple (NASDAQ:AAPL): 4.8% of assets

Manager(s): James Hamel and Andy Stephens. Hamel and Stephens are managing directors of Artisan and have co-managed ARTRX since the fund’s inception in September 2008.

Takeaway: ARTRX has an interesting portfolio mix for a growth fund: It’s far more technology-weighted than its peers in the category. Nearly 35% of the fund’s sector weightings are in technology, compared to a category average of just 14%. ARTRX has 58% of its holdings in U.S. stocks; much higher than the category average of nearly 50%. I’m not sure how that mix will perform if global equities rule the market next year — or if tech stocks slump.

Expense Ratio Front Load Deferred Sales Load MIN. Initial Investment Assets under management
1.34% N/A N/A $1,000 $333.6 million

#2 Best Mutual Fund: Hennessy Cornerstone Growth Fund

YTD Return: +30%

Hennessy Cornerstone Growth Fund (MUTF:HFCGX), a small-cap growth fund, chooses 50 roughly equal-weighted small-caps from a pool of equities with more than $175 million in market capitalization. The fund selects common stocks with the highest one-year price appreciation at the time of purchase. Holdings include life sciences stocks like Cambrex (NYSE:CBM), specialty chemical manufacturers like American Vanguard (NYSE:AVD) — as well as Papa John’s (NASDAQ:PZZA).

Top 3 Holdings
1. American Vanguard:
4% of assets
2. Cambrex: 3.1% of assets
3. Susser Holdings (NASDAQ:SUSS): 2.7% of assets

Manager(s): Neil Hennessy has been lead manager of HFCGX since June 2000; the 30-year industry veteran manages the entire family of quantitatively managed Hennessy Funds, and he is president, director and chief investment officer. Hennessy ranked among Barron’s Top 100 Mutual Fund Managers from 2003 through 2008.

Takeaway: Hennessy is keenly focused on investing in companies that are growing faster than their peers, but not overpaying for that growth. He tends to wave off otherwise attractive growth stocks with price-to-sales ratios higher than 1.5. He’s doing something right: HFCGX’s three-year performance is nearly 11%.

Expense Ratio Front Load Deferred Sales Load Min. Initial Investment Assets Under Management
1.33% N/A N/A $2,500 $308.8 million

#1 Best Mutual Fund: Fidelity Select Biotechnology

Fidelity mutual funds 401(k)YTD Return: +37.5%

Fidelity Select Biotechnology (MUTF:FBIOX), a mid-cap growth fund, has had a whale of a year — reflecting strong performance in the biopharmaceutical sector. This is the bleeding edge junction of healthcare and technology. Since some of these new drugs may never come to market, FBIOX is a riskier play than Big Pharma-focused funds. But the profit potential is huge, with companies like Gilead Sciences (NASDAQ:GILD) upping the ante with new HIV and hepatitis C treatments, and Amgen’s (NASDAQ:AMGN) profits soaring on biologics like the rheumatoid arthritis drug Enbrel.

Top 3 Holdings:
1. Amgen:
13.2% of holdings
2. Gilead Sciences: 13.2% of holdings
3. Biogen (NASDAQ:BIIB): 7.1% of holdings

Manager(s): Rajiv Kaul has been the lead manager on FBIOX since Oct 2005. Kaul’s biotech street cred is well established — so is his portfolio management expertise. He turns over even the smallest rocks in the arcane biopharmaceutical sector, then digs deep to master the companies and their drug pipelines, identify the most promising treatments, and estimate how much cash those products can throw off over the next decade.

Takeaway: Biotech should continue to be a vibrant market in 2013. While risk is always a concern in this industry, Kaul has his finger on the pulse of the industry and a good track record of managing this mutual fund; three-year performance of FBIOX is 23%. The lack of load and below-average net expense ratio sweeten the deal.

Expense Ratio Front Load Deferred sales load Min. Initial Investment Assets under management
0.83% N/A N/A $2,500 $2.68 billion

#3 Worst Mutual Fund: Franklin Gold and Precious Metals Fund

YTD Return: -14%

Franklin Gold and Precious Metals Fund (MUTF:FRGOX), a mid-cap focused mutual fund, normally invests at least 80% of net assets in stocks of gold and precious metals mining companies. The non-diversified fund has nearly 91% of its holdings in non-U.S. companies.

Top 3 Holdings
1. Newcrest Mining
(PINK:NCMGY): 7% of assets
2. Randgold Resources (NASDAQ:GOLD): 6.5% of assets
3. Goldcorp (NYSE:GG): 6% of holdings

Manager(s): Steve Land has been lead manager on FRGOX since April 1999.

Takeaway: FRGOX loved the Great Recession: After posting a 31% loss in 2008, its performance zoomed 68% in 2009 and 48% in 2010. Alas, it skidded back to a 25% loss last year. If you’re bullish on mining stocks for 2013, FRGOX is worth a look — but mining companies have been acting more like stocks lately, so buying into FRGOX isn’t the same thing as holding physical gold. FRGOX’s expenses are higher than I’d like; the 1% load add to the price tag.

Expense ratio front load deferred sales load min. initial investment assets under management
1.71% N/A 1% $1,000 $2.4 billion

#2 Worst Mutual Fund: Rydex Series Inverse S&P 500 Strategy Fund

YTD Return: -15%

The Rydex Series Inverse S&P 500 Strategy Fund (MUTF:RYURX) by Guggenheim is an inverse fund that aims to deliver the opposite daily performance of the S&P 500 Index.

Top 3 Holdings: N/A. This bear market fund’s strategy is to short sell equities to achieve the opposite performance of the S&P 500 index on a daily basis). RYURX uses derivatives like equity index swaps and futures contracts to bet against the S&P 500.

Manager(s): Michael Byrum is Rydex’s president and chief investment officer; he has been lead manager of RYURX since August 2001.

Takeaway: I’m a little concerned about inverse mutual funds like RYURX — particularly given FINRA’s jihad against inverse and leveraged exchange-traded funds recently. The regulator noted that inverse mutual funds could warrant a similar caution. “Funds such as these that are reset daily may present many of the same issues as leveraged and inverse ETFs, and should be subjected to a similar analysis,” FINRA said.

Expense Ratio Front Load Deferred Sales Load Min. Initial Investment Assets Under Management
1.41% N/A N/A $2,500 $167.4 million

#1 Worst Mutual Fund: Federated Prudent Bear

YTD Return: -16%

Federated Prudent Bear (MUTF:PBRCX), a mid-cap growth fund, has a strategy of short selling some U.S. equities while holding long positions in others, with the short positions predominant in the portfolio.

Top 3 Holdings
1. S&P 500 Index Futures:
57% of assets
2. C.H. Robinson (NASDAQ:CHRW): 1.1% of assets
3. Varian Medical Systems (NYSE:VAR): 1% of assets

Manager(s): Ryan Bend has been lead manager on PBRCX since December 2008 and specializes in selecting securities for the short portion of the PBRCX portfolio.

Takeaway: It has been a bad year for bear market mutual funds, but PBRCX has had a tougher time than some of its peers in the category. It doesn’t help that the fund’s expense ratio of nearly 2.5% is significantly higher than the category average of just under 2%. There’s also PBRCX’s 1% load to consider.

Sales Load
Min. Initial
Assets under
2.5% N/A N/A $1,500 $1.03 billion

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned investments.

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