3 great funds that only look lousy

Miller is another very patient investor -- his fund's annual turnover is 11% -- who has been sideswiped by the subprime mess and the related slaughter in housing stocks. He's a maverick stock picker who defies categorization. Despite the word "value" in the fund's name, its largest position is in Amazon.com (AMZN, news, msgs), which has a price-earnings ratio of 86.2, according to Morningstar. Two of the other largest positions, Qwest Communications International (Q, news, msgs) and JPMorgan Chase (JPM, news, msgs), have P/E ratios of 4.2 and 10.1, respectively.

Miller has reaped huge gains because he's been willing to take huge risks: This fund owns only about 40 names and has nearly half its assets in just 10 of them. Miller has ignored energy and the materials sector, missing out on the worldwide boom in commodities. Indeed, he's completely out of step with other investors -- and over the long term, that's the kind of manager to back.

A small-cap fighter

John Montgomery, the lead manager of Bridgeway Small-Cap Value, also marches to his own drum. In 2004, he lagged rival funds by nearly 4 percentage points; the following year he beat them by 12.5. Then in 2006 he did worse than 80% of similar funds. So far this year he's down an alarming 11.1%, nearly 4 points worse than his peers.

Montgomery uses computer models to pick stocks in various categories, and the small-value style is the one that two professors, Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College, famously identified as delivering the highest total returns over very long periods. This fund, like Davis New York Venture, is what Morningstar calls an Analyst Pick, meaning one of the best three or four of its type. Yet is has only $317 million in assets. (Davis has nearly $50 billion.)

Fortunately, its small size means it is still open to new investors; three of Montgomery's other funds are closed. In general, the best small-cap funds are closed because they would otherwise become so bloated they couldn't invest in small companies anymore.

Some funds with miserable performance records deserve investors' scorn, but these three certainly do not. Their example is good to keep in mind as you analyze your holdings each year.

Poor performance relative to similar funds should always catch your eye, especially if it coincides with a change in management or an increase in fund expenses.

But if the cause is that a favorite manager's favorite stocks are suddenly unpopular, that's the market's problem, not the manager's. Unpopular stocks are the cheapest ones and therefore potentially the ones with the greatest opportunity to rise.

Meet Middleton at The Money Show

MSN Money's mutual funds columnist will be among more than 120 investment experts sharing their strategies for 2008 at The World Money Show in Orlando, Fla., Feb. 6-9. Meet Tim Middleton in person at the MSN Money booth at 10 a.m. Friday, Feb. 8, or 10:30 a.m. Saturday, Feb. 9. Spend four days planning and refining your portfolio as you choose from more than 320 workshops and panel presentations.

Admission is free for MSN Money users. To sign up, call 1-800-970-4355 and mention priority code No. 009553, or click here to register online.

At the time of publication, Tim Middleton owned the following security mentioned in this article: Bridgeway Small-Cap Value.

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