Is Your Mutual Fund One of the Worst?

In 2008, the S&P 500 lost nearly 40%. Lots of investors and mutual funds did even worse than that. I was surprised recently to see which funds ranked among the year's worst performers:

• Legg Mason Opportunity Trust (LMOPX), down 66%.
• Winslow Green Growth (WGGFX), down 61%.
• Legg Mason Growth Trust (LMGTX), down 60%.

The Legg Mason Opportunity Trust fund is led by none other than Bill Miller, famous for beating the S&P 500 for 15 consecutive years. His streak did end a few years ago, though; his famous Value Trust fund fell 55% in 2008, and it's lagged the market over the past decade. (My Foolish colleague Rick Munarriz recently examined whether Miller has lost his touch.)

These dismal performances are probably enough to send most investors out the door, and to keep many would-be investors away. But should these funds really be avoided? Perhaps not. Their downfalls are largely due to a few factors:

• They're relatively concentrated, each holding fewer than 50 stocks, when a typical stock fund holds 100, 200, or more. Such focus can enhance both gains and losses.
• They made some regrettable and sizable investments in certain sectors. The Legg Mason funds, for example, made heavy bets on financial companies such as American International Group (NYSE: AIG) and Freddie Mac (NYSE: FRE), which didn't turn out so well.

Also, Miller isn't a dummy. His 15-year streak of yore suggests that he knows a thing or two about investing. And also, now that he's been burned, he's probably gained a few more valuable lessons.

Furthermore, investing isn't all about how you do in one year, or even two or three, sometimes. If you're bullish on a company, it can take some time to deliver. Miller's fund has stakes in homebuilders such as Lennar (NYSE: LEN) and Ryland (NYSE: RYL), which should see their stocks rise when the economy turns around. Both Legg Mason funds are also bullish on Amazon.com (Nasdaq: AMZN) and Yahoo! (Nasdaq: YHOO), which slid in 2008 but still have many fans. The Green Growth fund should see its fortunes improve when the economy does, too, as the demand for alternative energy increases and boosts holdings such as Energy Conversion Devices (Nasdaq: ENER).

Copyright © 2008 Universal Press Syndicate.