Sizing Up Mutual Fund Predictions for 2009

The mutual fund industry finally got what it wanted in 2009. After suffering through the double whammy of falling stock prices and investor redemptions in 2008, folks had little problem snapping up mutual fund shares once the equity markets began rallying in March.

It's amazing what a little stability and optimism can do for a sector that turns into a shrinking violet when the markets begin to teeter.

I made four industry predictions a year ago, and it's only fair to see how my 2009 forecasts panned out before I go out on a limb in a future article for 2010. Let's go over my four calls.

1. Investors will follow the money
"In the realm of publicly traded fund companies, I see T. Rowe Price (Nasdaq: TROW  ) beating the market. Legg Mason (NYSE: LM  ) won't be so lucky," I wrote last January.

My basis was sound. Roughly two-thirds of T. Rowe Price's funds had beaten their respective averages over the past year. Legg Mason, on the other hand, was responsible for two of 2008's worst-performing funds. Just as mutual fund investors chase performance, stock pickers flock to the companies attracting inflows of capital.

It turned out to be a good year for investors in both companies. T. Rowe Price's stock soared 54% last year. Legg Mason cranked out a 41% gain. The S&P 500 rose by a more modest 23%.

I may have scored a relative victory here -- since T. Rowe did outrun Legg Mason -- but I have to score this fairly. T. Rowe Price handily beat the market, so I was half right. Legg Mason also handily beat the market, so I was half wrong.  

2. Morningstar will also beat the market
The mutual fund and stock research specialist bounced back in 2009. After shedding more than half of its value in 2008, Morningstar (Nasdaq: MORN  ) inched 36% higher last year. Yes, that is certainly good enough to beat the market.

This may seem like an easy call in retrospect. Rallying markets woo fund buyers, and I pity the investor who doesn't check the Morningstar rating of a potential mutual fund purchase before diving in with that initial investment.

The appetite for independent research doesn't always work out that way. TheStreet.com (Nasdaq: TSCM  ) was actually closing out the year lower than when it started. China Finance Online (Nasdaq: JRJC  ) posted marginal gains, despite healthy market gains in the world's most populous market. However, fundamentals played a part in keeping both of those stocks back. Morningstar has been a solid performer when bullish sentiment is in the air.

3. Bill Miller will bounce back
"I'm going out on a major limb here, but I think Legg Mason's Bill Miller is due to bounce back in 2009."

The industry's rock star had fallen hard since his legendary Legg Mason Value Trust proved fallible. Miller led his flagship fund to 15 consecutive years of beating the S&P 500 through the end of 2006. Then came 2006. And 2007. And 2008.

Year

Return

Vs. S&P 500

2006

5.9%

(9.9%)

2007

(6.7%)

(12.2%)

2008

(55.1%)

(18.1%)

Source: Morningstar.

Despite the "value" in the moniker, Miller peppers his portfolio with plenty of classic growth stocks. Some of his largest holdings include Amazon.com (Nasdaq: AMZN  ) -- which may not seem outrageously priced on a free cash flow basis, but is certainly stratospheric in terms of its P/E multiple -- and the perpetually premium-priced Google (Nasdaq: GOOG  ) .

Naturally, Miller's style will serve him well during bull cycles, when his pen of high-beta stocks have room to run. With tech stocks leading the way in 2009, Miller's fund closed out the year with a 40% increase in net asset value.

Welcome back, Miller.

4. International funds will beat their domestic peers
I figured that the rest of the world would get over its recessionary woes before we would begin to pull ourselves out, and I was right. All but one of Morningstar's 13 international fund categories trounced the S&P 500 last year.

The lone exception was the fund class that invests exclusively in Japanese equities.

So, in retrospect, it wasn't a bad run with the crystal ball. I was correct in 3 1/2 of my four predictions. That's certainly good enough for a passing grade at this point.

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Google and China Finance Online are Motley Fool Rule Breakers picks. Amazon.com and Morningstar are Motley Fool Stock Advisor selections. The Fool has a financial position in Legg Mason and Morningstar. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz invests mostly in stocks but always has a mutual fund or two in his portfolio. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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