Mutual funds had little to boast about in 2008, but this year they had recovered most of their losses for the year by May.

Which mutual funds have outperformed in 2009 so far, and what can their strategies tell us?

After years during which investors defected to mostly passive exchange-traded funds, active management appears to be back in favor. And in a market where stocks are cheap, it probably takes a value manager to figure out which ones deserve to stay cheap. Morningstar's top five mutual funds all feature value-oriented, bottom-up strategies and are run by well-known stock-pickers. "Funds that employ a little tactical investing are doing better," said Andrew Gotfried, the director of mutual fund research at Raymond James. "They're better able to identify pockets where they can invest. Value or growth funds can't be automatically relied on. It's really all about the manager and the specific fund."

SERIAL WINNERS

In first place is Longleaf Partners Fund. The mid- to large-cap value fund was up 22.5% for the year through May 9, compared with an S&P 500 index that was just climbing back to where it had been Jan. 1. In many ways this is not surprising. Though Longleaf sank as oil prices fell last year, the managers Mason Hawkins and Stanley Cates have beaten the S&P every year for the past decade.

These managers are serious deep discounters, said Morningstar analyst Gregg Wolper. They look for companies that "are trading at 40% or more discounts to their estimate of intrinsic value." One aggressive bet — a 20% stake in Sun Microsystems in 2008 — paid off handsomely this year. The payday was expedited by Oracle's buying Sun in a deal that Hawkins and Cates helped promote, naming a director to the Sun board.

Hawkins said that he looks for companies with competitive advantages and lots of free cash flow. With 80% of the fund concentrated in just 10 stocks, this is a volatile choice but one that has performed. The fund recently reopened itself to new investors after being closed since July 2004. "This is a solid, long-term choice for hardened souls who can tolerate the inevitable rough patches," Wolper said.

Ariel Appreciation is a mid-cap blend fund that had a return of 16% through May 9. It was disappointing last year, given that it had done well in the 2000 to 2002 bear market, said Morningstar analyst Arijit Dutton. The difference was that its "deeply contrarian" managers, John Rogers and Matt Sauer, were heavily overweighted in financial stocks. In the current slump "the market punished anything remotely controversial," Dutton said. Nonetheless, he said, Ariel's managers offer a long track record of "competitive long-term results with moderate volatility." He predicted that the market will eventually vindicate their picks, which are focused in financial and business services, including Hewitt Associates and Janus Capital.

"We look for companies that are best in class, that are in industries where we have some expertise," said Jason Tyler, a senior vice president and member of the Ariel fund's investment committee. "We try to pick the right entry point, when we can get good value."

CONTRARIAN

The third-highest return was earned by the large-cap growth fund Oakmark Select, up 14% at May 9. Its well-known manager, Bill Nygren, is also a value investor and an unapologetic contrarian. This caused problems for Oakmark in 2007 when Nygren invested heavily in Washington Mutual, whose stock at one point was 15% of his portfolio. The fund was hit hard by the housing bust, which Nygren had underestimated.

But by 2008 he managed to get out of financials and hold the fund's loss for the year to 37%, slightly better than the overall market. Contrarian media plays — Discovery Communications and Liberty Media — worked out well, as did a bet on the drug company Schering-Plough, which had been out of favor and was subsequently bought by Merck.

Nygren said, when he buys a stock, he sees it as buying a share in a business. "Too many investors view stocks as a game rather than an assessment of what a company is really worth," he said.

He looks for three things: a stock selling at a large discount to a firm's intrinsic business value (the highest price someone could pay for the company and still earn a reasonable return), a business value that can be expected to outperform the S&P 500 during the next five years and a management that acts in shareholders' interest.

The fund has a low turnover, about 20% a year, and holdings in 55 companies. It wisely eschewed industrials and commodities last year. This year, it is a little overweighted in technology stocks, Nygren said, as well as media, and is making large investments in companies. such as Tyco Industries, Capital One Financial, eBay, Medtronic and Dell.

Third Avenue Value Fund fared slightly worse than the market in 2008, primarily due to a 60% allocation to financial services, but it has roared back this year, with a 13% return. Third Avenue's veteran manager, Marty Whitman, is a "premiere value manager, with a proven knack for wringing value out of the market's refuse," said Morningstar analyst Brigit Hughes.

COLLECTING COUPONS

Besides value stocks, Whitman buys distressed companies on the brink of or in bankruptcy for up to 35% of his portfolio. "He's happy to collect coupons while holding bonds to maturity," she said.

Weitz Partners Value Fund brought in 8% through May 9, making it the fifth-best performer. Those who cut and run from this fund will probably regret it, said Morningstar analyst Mike Breen. Fund managers Wallace Weitz and Bradley Hinton struggled last year, lagging two-thirds of their peers as they bet heavily on AIG and Fannie Mae, but these "bold contrarians" have turned things around, besting 97% of the competition this year. "This is a feast-or-famine fund but one which has crushed the Russell 1000," with an 11.3% average annual return since its inception in 1983, Breen said. "They don't shy away from controversial, beaten-down stocks. They are right considerably more often over time."

Hinton said most value funds, including Weitz Partners, had some missteps recently but his team made a good decision a little over a year ago: It realized that financial firms had "let things get out of control" and dumped all financial sector holdings in mid-2008.

He and Weitz then did a thorough review of the fund's holdings to ensure that each company had a strong enough balance sheet to survive several years of negative to slow growth. This led to a commitment to hold on to their positions. "For us, it's all one company at a time," Hinton said. "Our motto is 'Buy and watch closely.' "

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