Performance over long haul, not merely one cycle, is better indicator

They are the stars in one of the toughest periods in stock market history — the seven mutual funds that made the most money for investors between the end of the 2000-02 bear market and what is hoped to be the end of the most recent bear market, March 9.

But does that mean you should buy them?

Take the CGM Focus fund. It was truly a standout in the last market cycle — from Oct. 4, 2002, to March 9, 2009. But that provided no solace for investors.

CGM ended on top of the list not because of a steady upward ride, but largely because of the tremendous returns it provided investors in 2005 and 2007. In 2007, the fund’s return of 80 percent was so outstanding it allowed the fund to drop 48 percent while the stock market dropped 38 percent in 2008 and still top the list.

It’s pretty amazing that a fund could lose 48 percent and still end up at the top, said Ryan Leggio, a Morningstar analyst.

And he does not think most investors reaped the benefits. Shareholders bail out during extremes, he said. That’s especially true if they come to a fund expecting results such as CGM’s return in 2007.

Still, for those with courage, CGM could be a fine choice if it continues to do what it has. Not only did it outperform all other funds in the last market cycle, but it also did the same in the previous cycle — from Sept. 1, 2000, to Oct. 12, 2007.

Focusing on a complete market cycle gives investors a long period in which to analyze a fund, Leggio said. It allows investors to see how the fund maneuvered as the market recovered from one bear market and ran into another.

When picking mutual funds, performance in a few months or even a year is unreliable. Looking at a full market cycle, and preferably several full market cycles, can give an investor an idea of how a fund behaves in rising and falling markets, Leggio said.

Few funds hold up cycle after cycle, so a fund in the top third in two cycles could be more significant than one in the top 10 for one cycle. Leggio points to Fairholme as an outstanding fund that has been less volatile than CGM and has been among the top 5 percent in the two most recent market cycles. It was the second-best performer between 2000 and 2007. And it repeated that performance in the latest bear, ranking 21st out of 766 funds.

Another superior fund is the Wasatch One Source Income Equity fund, which ranked 12th in the recent cycle and 14th in the previous one. Among the top seven in the most recent cycle, Eaton Vance Dividend and Leuthold Select also did well in the previous cycle, with Eaton Vance 36th and Leuthold 41st.

That put them well within the top third of all funds, a position considered admirable. Also within that group are the two Amana funds. The funds follow Islamic law, avoiding companies with debt, a practice that kept them away from banking disasters amid the financial crisis.

If a fund could promise to be in the top 30 percent in the next cycle, you’d say: ‘Give me that fund,’ Leggio said.