I didn't do too shabbily with my 2009 predictions for the mutual fund industry. I got 3 1/2 of my four calls right, but now it's time to see whether I can improve on that passing grade.

These are exciting times in the industry. Long-term mutual funds have experienced net inflows for 43 weeks in a row, according to the Investment Company Institute. Most of the new money has gone into bond funds, likely the handiwork of yield chasers that are frustrated at the floor-scraping returns on money market funds these days. Several months of rallying equity prices have helped ignite interest in stock funds, too.

So let's whip out the crystal ball and see what the industry has in store for us in 2010.

1. Bill Miller will beat the market in 2010  
Legg Mason (NYSE:LM) ran a couple of the worst-performing funds of 2008. Bill Miller's flagship fund, Legg Mason Value Trust, stunned shareowners with a 55% plunge.

Miller had been the industry's rock star through the 1990s and the first half of the 2000s. Legg Mason Value Trust beat the S&P 500 for 15 consecutive years, a feat that no other active manager is even close to approaching.

Unfortunately for Miller, 2006 was a stinker. Things got even worse in 2007, and 2008 was an absolute disaster. Redemption arrived last year, even though it may take a couple of more years to overcome 2008's shortfall.



Percentage Points Above (Below) S&P 500













Source: Morningstar.

Quite simply, I like Miller's chances in 2010. This is his kind of market. He has a way of redefining the "value" in his fund's moniker, by loading up on the tech-warming growth stocks that should continue to thrive in an economic recovery.

According to Morningstar, his largest reported holding is AES (NYSE:AES), a global energy company with healthy exposure to the booming Latin American market.

2. Morningstar will beat out Value Line
Speaking of which, Morningstar (NASDAQ:MORN) and Value Line (NASDAQ:VALU) are passing ships. Morningstar began as a mutual fund researcher and evolved into a top-notch equity tracker. Value Line established itself as a stock analyzer and parlayed that brand into running a family of actual mutual funds.

Both ships may be heading to intriguing ports, but Morningstar is just the better stock to own, in my opinion.

Growth investors probably aren't impressed with Morningstar's flat performance through 2009, but better times are ahead. Wall Street sees revenue and earnings climbing by 9% and 17%, respectively, this year. Morningstar trades at a premium multiple to its forward earnings, but it's also worth what you pay. It has beaten expectations in each of the three previous quarters. As net inflows into funds continue, the appetite for Morningstar's research will intensify.

Value Line is still trying to exorcise the demons of its past. It ended its practice of using affiliated brokerages -- a black-hat misdeed that allegedly bilked fund investors through pocketed trade-commission rebates -- in 2004. And it finally settled with the SEC this fiscal year, when it forked over $43.7 million. The company didn't have to admit responsibility, but at least in my eyes, the hefty settlement says it all.

The credibility-restoration process continues, but the lone analyst putting out profit targets sees Value Line posting lower earnings in fiscal 2010, and even lower net income the following year. Value Line stock is a compelling turnaround play, but Morningstar shares are less of a gamble.  

3. Mutual fund companies will beat the market in 2010
It doesn't take a rocket scientist to work the favorable math on the mutual industry. Investors are pouring money into stock and bond funds. Since most funds bounced back in 2009, the organic asset bases were already on the upswing before the deluge of new investments.

Mutual fund companies make most of their money from management fees that are based on a percentage of assets. As long as investments outweigh redemptions, the industry is going to be an attractive sector to invest in this year.

I'll take this prediction one step further and name three publicly traded fund companies that I see sporting market-beating gains.

  • Janus (NYSE:JNS): If Value Line needs a little inspiration in overcoming credibility killers, Janus is a good role model. Janus also faced accusations that it cheated its fund investors several years ago. It paid the price and moved on. These days, Janus is weighed on its performance, with a whopping $151.8 billion in assets as of the end of September.
  • T. Rowe Price (NASDAQ:TROW): Through the first nine months of 2009, assets under management at T. Rowe Price rose by 32.5%. It just keeps churning out winners: 87% of the T. Rowe Price funds across their share classes were beating their comparable Lipper averages over the five year period, through the end of September. Money follows performance.
  • Invesco (NYSE:IVZ): Invesco is a global powerhouse, with $423.1 billion in assets under management. It's also a major player in the ETF space with PowerShares.

This is shaping up to look like a good year for the industry. Let's hope my crystal ball doesn't crack.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.