Which Mutual Fund Made Money in 2008?

Equity investors did not have much to cheer about in 2008. As the global banking system teetered on the brink of collapse, equity markets went into free fall, shredding trillions of dollars in a matter of months. According to Morningstar, Inc., the leading provider of independent investment research in North America, only one mutual fund turned a profit in 2008. 

Forester Value was managed by Tom Forester, a mutual fund manager from Chicago who was able to turn a profit of 0.4% for investors in 2008. This may seem a small margin, but relative to the S&P 500 Index, which plunged 38.5% in 2008, Forester’s success was striking. Forester Value is not a household name in the fund management industry, with assets much smaller than its counterparts. However, in 2008, a return of just 0.4% made Forester the brightest star in the industry. The average mutual fund lost 30% on the year, according to Morningstar data.

The differences between Forester Value and all of the other mutual funds were in Tom Forester’s conservative investing strategy directed toward dividend-paying stocks and the fund's excessive cash holdings. These characteristics rendered Forester’s fund more agile than the monolithic mutual funds that bore significant losses during the crisis, allowing it to hold fewer dropping securities and leaving it agile enough to buy when certain stocks dropped to desirable levels. Typical mutual funds hold around 5% cash, though many try to keep that number lower. Cash underperforms equities during rising markets, but when the markets fall, it preserves value and can be quickly deployed to take advantage of buying opportunities.

At times, Forester held 30% of the fund in cash, waiting for stocks to fall into "bargain" territory. In an interview with The Wall Street Journal, Forester noted the mutual fund industry underperformed in managing risk in the years leading up to the crisis and outright failed to manage and assess it when it mattered most.

Additional factors behind Forester’s success include a smaller leadership structure that was less accountable to short-term focused performance standards that accompanied quarterly reviews. Forester owns his own fund and maintained a consistently conservative investing methodology through the market growth of 2005-2006. In this case, being a conservative active fund manager served Forester well in the face of the market volatility that revealed itself in 2007-2008.

Labeled as a “safety-minded investor” in an interview with The New York Times, Forester argued that similarly minded fund managers should orient their stock portfolios toward stocks that pay dividends, which protect modestly against stock price decline while potentially generating consistently greater payouts over time. The earnings growth for players invested in dividends also tends to offer greater stability than other stocks.

Forester invested in recession-proof companies during the crisis, such as Wal-Mart Stores, Inc. and McDonald's Corporation, but opted to buy low in the aftermath. Immediately following the recession, Forester was able to take advantage of the commodity sell-off, which saw oil and natural gas plunge by more than 50% in a span of six months. In addition, Forester targeted companies specializing in retail and tech.