"Managers don't go from geniuses to idiots overnight."
-- Russell Kinnel, director of mutual fund research at Morningstar
The quote above comes courtesy of a recent Bloomberg article that discussed the lackluster performance of mutual fund all-stars Bruce Berkowitz, Ken Heebner, and Bill Miller so far this year.
We could actually read that quote a couple of different ways. The obvious read is that when a top-performing manager's performance dips, it doesn't mean that he's suddenly lost his touch. However, we could also take the view that when a stock picker's performance badly falters, perhaps he wasn't the genius that we originally assumed he was.
Of course Berkowitz, Heebner, and Miller aren't just any trio of schmoes that had a few years of good returns -- the three have delivered outstanding performance over extended periods of time and provided good reason for us to believe that they have legitimate skill.
For mutual fund investors, this might be good reason to grit your teeth through the recent underperformance. But for those of us trying to dig up great individual-stock investments as we manage our own portfolios, the beaten-down portfolios of these top investors might provide some good ideas for us as we approach the year's midpoint.
Let's take a closer look.
Through his Fairholme family of funds, Berkowitz has had a big bet going on financials -- and that's helped provide plenty of drag on his results so far this year. AIG is the fund's largest holding and it has lost -- after adjusting for an early year dividend -- roughly 40% in 2011. Bank of America
The declines suggest that investors definitely have an eye toward the risks involved. But what would an optimist say? While new government regulations are part of the bear case, we've seen very clear evidence that the government also doesn't want to see these financial behemoths falter.
Maybe even more important to a value investor like Berkowitz is the fact that these stocks are cheap. Most of the stocks listed above are trading at less than book value. AIG changes hands 0.6 times its book value and Bank of America is being valued at just over half its equity.
Heebner has shuffled up the holdings at Capital Growth Management (CGM) significantly since the end of last year. His top three holdings at year end -- Ford
So if Heebner has lost faith in these top holdings, then what can we take away from his portfolio? The stocks he thinks he'll be able to ride to recovery.
Heebner had been hoping that a rebounding U.S. economy would be good for auto- and auto-parts-makers like Ford. While he may have given up on the latter thanks to a less-rosy economic picture in the U.S., Tata Motors remains one of his top holdings, suggesting that he thinks the theme could still play out in India.
The investment philosophy of Heebner is very different than that of Berkowitz, and you'll see very few of his holdings stick around for years on end. And yet priceline.com
Now I have to admit, if there's anyone of these three managers that I have my doubts about, it's Miller. Though he registered a streak of screaming-hot performance that put his name in the mix with the best investors out there, the walloping that both the Legg Mason Value Trust and Opportunity Trust took in 2008 suggests that there may have been a severe dearth of risk management. The 10-year performance of the Value Trust now lags the S&P 500, and depending on the class of shares you look at, the Opportunity Trust is also trailing that index.
As with Berkowitz, Miller's year-to-date drubbing has been helped by the struggles of some financial stocks. However, there is also a handful of major non-financials holdings that have gotten clobbered, including Eastman Kodak
Is investing in a former leader in a dying industry a terrible idea? Not if you ask Miller. The Opportunity Trust has held Kodak for years, and back in 2007 when everyone was still patting him on the back, he said this in a Globe and Mail interview:
Kodak, right now, has made the transition. It's actually doing well, the numbers are coming in better than people thought. Kodak actually told us a couple of weeks ago that they now have the highest number of requests from investors to come visit them, ever. [We] think it's a $45 stock.
At the time he wrote that, the stock was closing in on $30. Today it's $3 and change. If we didn't mistake luck for skill in the case of Bill Miller, perhaps Kodak could be the ultimate comeback stock.
While my fellow Fools may not have the name-brand cachet of the investment managers above, they are nonetheless ready to serve you some stocks that could help your portfolio ride high in the back half of 2011. You can download their free special report, "5 Stocks The Motley Fool Owns -- And You Should Too."
The Motley Fool owns shares of Ford Motor. The Fool owns shares of and has opened a short position on Bank of America. Motley Fool newsletter services have recommended buying shares of Ford Motor and priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.