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In addition to advising against market timing, we always strongly recommend diversification as the best way for investors to reduce risk. For that reason, we believe that mutual funds are very appropriate for many investors because they provide ready-made diversification. However, given our contrarian bent, we don’t like just any mutual funds; rather we like funds that either focus on turnaround investing as part of their strategy (see the article in the October 2012 Turnaround Letter) or are themselves something of a turnaround. This latter category usually means funds with good long-term track records that have stumbled for a year or two.
Last year around this time (see the March 2012 issue), we looked at nine funds that fit in this rebound category. They had underperformed significantly in 2011 despite strong long-term records. As a group, they definitely lived up to our expectation that they would turn around: the average return (net of fees) for the nine funds for 2012 was just shy of 20%, almost four percentage points better than the S&P 500.
The stock market was less volatile in 2012 than it was in 2011, but nonetheless a number of funds with good long-term records stumbled last year. We’ve highlighted several of them below that we expect to revert to their winning ways before long. Find out which mutual funds George Putnam recommends for prudent contrarian and value investing.