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The best and worst of Wall Street 2011: Mutual funds

December 12, 2011, 3:00 PM UTC
Fortune

In the turbulence of 2011, boring was beautiful for mutual funds. Riskier funds that owned shares of banks and emerging-markets companies got crushed, while safe, plain-vanilla portfolios focusing on utilities, health care, and consumer staples shone. And the top performers owned Treasuries; as investors fled risky sovereign debt, funds that held long-term bonds from the U.S. government returned 28% on average.

Among major fund companies, the top performer was First Eagle, a New York City money-management firm with $56 billion in assets. First Eagle endured a tumultuous few years during the mid-2000s. Legendary value investor Jean-Marie Eveillard retired in 2004, de-retired in 2007, and left again two years later, making him the Brett Favre of mutual funds. That kind of drama usually gives investors fits, but First Eagle shareholders can rest easy: Through October, First Eagle’s five funds outperformed 82% of their peers, according to Morningstar. That makes them the top-performing fund family among firms with assets of more than $20 billion.

First Eagle’s strategy is classic value — its managers look for companies with a disconnect between their stock price and their fundamentals — but the firm is equally obsessed with managing risk. Its funds, which maintain large positions in gold bullion, boosted their cash holdings before this summer’s market rout. That conservative approach paid off. Says Matthew McLennan, a former Goldman Sachs managing director who now oversees several First Eagle funds: “We’ve made money for our clients over time by not losing money.” Mina Kimes

OTHER FUND FAMILIES
(Average category ranking)

2. GMO (top 20%)
3. Artisan (top 27%)
4. Vanguard (top 30%)
5. TIAA-CREF (top 34%)

BAD CALLS

Bill Gross
Pimco

The Pimco founder made a massive bet against U.S. Treasuries this past spring. But Gross’s thesis of rising interest rates never panned out, and his main fund lagged behind 90% of its peers.

Bruce Berkowitz
Fairholme

Investments in big banks have proved disastrous so far this year for the once-heralded Berkowitz. His Fairholme fund has dropped nearly 30% YTD, and assets have been halved.

Bill Miller
Legg Mason

The famed value manager stepped down from Legg Mason’s Value Trust fund (LMVTX); a second portfolio he runs is down 34% YTD.

Note: Fund comparisons based on performance data through 10/31/2011.

The best and worst of Wall Street 2011

This article is from the December 26, 2011 issue of Fortune.