NEW YORK Mutual funds that rose to the top of the 2012 Lipper U.S. Fund rankings overcame a tumultuous and eventful year that had investors - and their advisers - on the edge of their seats.
The European debt crisis, devastating Japanese earthquake, near-shutdown of U.S. government and a wave of revolutions in the Middle East and Africa were only a few of the shocks that slammed global and U.S. markets.
Despite the uncertainty, certain firms including PIMCO, Hotchkis & Wiley Capital Management LLC and Christian-values fund manager GuideStone Financial Resources surged to the top of the closely watched rankings.
Some fund families also bucked expectations. PIMCO, for example, is known for its bond funds but it took top honors for its equity funds.
In a conversation with Reuters, Lipper's head of research services, Tom Roseen, explained Lipper's quantitative fund-picker method, highlighted some unusual and overlooked winners and divulged the surprising trend of this year's pool.
The Lipper Fund Awards were officially presented in New York on Thursday.
Q: What is the most important factor for picking the winning funds or firms?
A: We've found that the most relevant measure for investors is consistent return. Investors actually fear downside performance more than they look for upside performance. The fear factor outweighs greed.
So we look for a long track record of strong, risk-adjusted performance. We penalize funds for having downside performance. It's a pretty complex model.
For that consistent-return measure, we give a rating of one to five, with five being the best. To identify the top-performing fund, we find the best score in that top quintile and we designate that (as the winner). And it's based on three-, five- and 10-year performance.
Of course, we do (watch for certain nonquantitative measures such as) movement within a reclassification. Say you were a small-cap manager and you turned your fund into a large-cap fund. That's not fair to the other large-cap funds. So we do take that opportunity to weigh in and provide an opinion. But a majority of this award is based on quantitative research. Not qualitative.
Q: What winners jumped out at you this year?
A: For the overall award winners, we have PIMCO winning Lipper's best equity in the large fund group for the third-consecutive year. PIMCO is known for their fixed-income funds, but they didn't win for their fixed income or their mixed assets. They won for their equity. I thought that was kind of unique.
There are other repeat winners as well. Hotchkis & Wiley won in 2011 and 2012 for small-company equity, and Delaware Management Co won for best mixed assets and they won two years in a row as well.
But the unclaimed heroes - these are companies that swept the awards. They won for the three-year, five-year and 10-year awards. For example, the Delaware Extended Duration Bond Fund and they won for 2011 and 2012.
Their management team has obviously done something right.
Q: What theme surprised you this year?
A: I was surprised by the repeat and "three-peat" winners in our fund family awards. To have PIMCO, Hotchkis, Delaware & Wiley repeat tells me these firms are doing something right.
And going back to GuideStone - they've shown that niche-focused strategies can actually work.
Q: What funds or firms caught your notice in their move to the top?
A: (Christian-values firm) GuideStone won the best overall small company award. To be a small overall winner, you had to have at least three unique equity funds, three unique fixed-income funds and three unique mixed-asset funds. And GuideStone had the best average score of any other small-company firm we looked at. We considered a fund family small if they managed less than $40 billion.
The unique piece with GuideStone funds is that they have to stick with their Christian-value knitting. That seemed to be successful during this three-year period, not only for equities but their fixed-income funds and their mixed-asset funds.
It shows you that socially responsible investing, whether it be for religion, politics or ecological (issues), can pay off in the long run.
Q: What else jumped out at you?
A: OppenheimerFunds. They have a ton of three-year winners in the municipal-bond area.
This is an important area because of what Meredith Whitney did (in late 2010). She called for a breakdown in the municipal bond market, a ton of failures, a whole bunch of bankruptcies and that turned out to not be true.
What's amazing is that the returns and the yields have been extremely good in this last year. People are now trying to find that particular municipal bond fund that can help them in their portfolio, and Oppenheimer had a slew of them. In fact, they are winning 19 awards and a super majority, 11, are municipal bond funds.
Q: Do you ever get calls from disappointed firms?
A: We've had people who've called and said, "We beat these guys in total return - why didn't you pick us?" And we said, "Because investors really don't really care about total return, especially if you're going to have downside."
Top performing managers have called us to say, "We've deserved this." And we've said, "We looked at your downside performance over the same period of time and you got killed in X, Y, Z year and this is why you didn't get chosen."
But we've never had an individual investor or an adviser call and say, "You were wrong."
(Editing by Jilian Mincer, Walden Siew and Matthew Lewis)