Brandywine Fund is rebounding from a woeful 1998 caused by its managers' ill-timed decision to sell stocks and raise cash.
Led by money manager Foster Friess, Brandywine had as of Friday risen 18.2 percent this year, exceeding the 15 percent gain of the Standard & Poor's 500-stock index during the same period. Last year the fund fell 0.65 percent in a period when the S&P 500 soared 28.6 percent.
The difference: Brandywine Fund had just 2.5 percent of assets sitting idle in cash at the end of June. That's about half what the average U.S. stock fund devotes to cash, and it's way down from February 1998, when almost 70 percent of Brandywine's assets were in cash.
"Last year was a nightmare for Brandywine," said John Rekenthaler, director of research at Morningstar Inc., a Chicago-based firm that conducts research on mutual funds. "It's important to recognize, however, that the fund has been around a decade and a half and 1998 was its only bad year."
Many investors failed to share Rekenthaler's long-term view and instead pulled money after Brandywine Fund's managers veered from their expected path and performance suffered.
The reaction was similar to a more publicized case in early 1996 when Jeff Vinik, former manager of Fidelity Magellan, increased his holdings of bonds and cash at a time when stocks were rallying. The fund's returns soured and investors withdrew their money.
Last year an estimated $3.4 billion was redeemed from Brandywine. Another $940 million was pulled in the first five months of this year, according to analysts at Financial Research Corp., a Boston-based firm that tracks fund flows.
"The fund has been among the most hard hit," said Chris Brown, an analyst at Financial Research. "Investors seem to be still pulling money even as the fund's performance improves. It's a sign of how hard it is for funds to reverse negative momentum once it begins."
Brandywine's assets have shrunk to $4.4 billion, from $7.7 billion a year ago.
"As of right now, new investors coming into the fund are in better shape than a year ago or even two years ago, when assets were so large," Morningstar's Rekenthaler said. "It's easier to manage a smaller fund than a big one, especially one like Brandywine that focuses investments in mid-sized companies."
Rekenthaler said he has 10 percent of his own 401(k) retirement assets invested in Brandywine Fund. Rekenthaler also has investments with Vanguard International, Templeton Developing Markets and Fidelity Low-Priced Stock.
Brandywine's assets have stabilized in recent months as performance improved, buoyed by investments in Tellabs Inc., one of the world's largest makers of phone equipment; Tyco International Ltd., the world's top maker of security and fire-protection systems; and Nokia Oyj, the world's largest maker of cellular phones.
"Many of these stocks are not new holdings," Friess and Brandywine's other managers wrote in a recent letter to investors. "Some weathered an extended period of being overlooked, and were only recently recognized for their superior fundamentals. In many cases, sticking to our guns is now paying off."
Brandywine is among a handful of widely held stock funds that are recovering from a sub-par 1998 at the same time they face shareholder redemptions. Others are the $18.9 billion Vanguard Windsor fund, up 18.4 percent this year as of Friday, compared with a rise of only 0.81 percent last year.