BOSTON – Playing it safe paid off in 2008 for Tom Forester and David Ellison, two standout mutual fund managers in a year when winning meant losing less money than the competition.
Forester's eponymous Forester Value Fund (FVALX) focused on stocks that typically do well in recessions to roughly break even for the year, declining just 0.82 percent through Tuesday — easily making it the top-performing large-cap value fund of the year, according to Morningstar Inc. data. The second-place Copley Fund was down nearly 17 percent, which was still well above the average decline in the category of 38 percent.
Ellison's FBR Small Cap Financial Fund (FBRSX) also stood out in 2008, ranking No. 2 among financial sector funds. It shed just 10 percent of its value, easily beating the category's average decline of 45 percent.
If the economy is poised to turn around, Forester and Ellison might do well to heed the contrarian investment maxim that yesterday's winners are likely to be tomorrow's losers.
But the two managers — both of whose funds carry Morningstar's five-star ranking — aren't yet ready to budge from the approaches that served them so well in 2008. Neither sees enough positive economic news to merit shifting from investments that typically do OK in recessions to those more likely to gain when conditions improve.
"I'll probably be in some of the same stocks for the first six months or so of 2009," said Forester, whose recent success has drawn new clients and boosted his fund's assets more than fivefold since the start of 2008, to $55 million. "And then as I see things getting better, I'm going to shift out of the real defensive things, and get more constructive on the more cyclical stocks that can grow quite well as we come out of this period."
The fund's top five holdings as of Sept. 30 included Kraft Foods Inc., Johnson & Johnson and H.J. Heinz Co. — three companies that managed to outperform broader markets for the year, with their shares all losing less than 20 percent. Other 2008 investments included Wal-Mart Stores Inc. and McDonald's Corp., which draw budget-conscious consumers during hard times.
Forester also spent 2008 easing out of financial stocks with heavy exposure to the mortgage meltdown, and unloading energy holdings before skyrocketing oil prices reversed course at midyear.
While Forester used much of his fund's cash holdings to snap up low-priced stocks in the third quarter, Ellison continues to keep plenty of money on the sidelines. About 40 percent of his $179 million fund's assets are in cash, and Ellison said he doesn't plan to use much of it until he sees signs that the slide in home prices and the surge in job cuts are about to end.
The former bank teller has managed his small-banking specialty fund since its inception 12 years ago. While smaller banks generally weren't as exposed to mortgage troubles as much as larger rivals, Ellison took pains to find the small banks with the least risk. Shares of his fund's top holding, Paramus, N.J.-based Hudson City Bancorp., were up about 4 percent for the year through Tuesday.
Now, the key for both Ellison and Forester is figuring out when to adjust their strategies as markets eventually build momentum for an expected rebound.
Forester expects that to happen around mid-2009, when he hopes to move out of defensive stocks and into industrial and technology companies whose business tends to move in tandem with the economy.
He expects his consumer staples and health care picks will continue to beat the broader market through the first half of 2009 or so, followed by what he calls a "tipping point" when more cyclical stocks will come into favor.
Any recovery next year will likely be accompanied by volatility as markets test the staying power of the early indications of a rebound — just as 2008 saw the market go on a bumpy ride searching for a bottom.
"It wasn't necessarily a buy-and-hold year in 2008," Forester said. "And I think that 2009 will be the same."
In an otherwise battered financial sector where big banks have been hit the hardest, Ellison is confident his small bank investment niche will continue to perform relatively well. Smaller players won't face as much uncertainty in 2009, given the likelihood that regulators will rewrite investment and accounting rules to prevent some of the abuses that led to the financial meltdown.
"The little guys didn't do any of that stuff," Ellison said. "So they didn't have all the complicated and aggressive accounting schemes that are going to be regulated away."
But Ellison doesn't believe big profits are just around the corner for small banks. There are too many uncertainties in the economy, and currently low borrowing rates for everything from mortgages to auto loans will pressure all banks' bottom lines. So for now, Ellison hopes to keep plenty of cash on the sidelines.
"I think unaffordable mortgages are still going to chew on the economy for a while," he said.