When the Matthew 25 Fund fell 40 percent in 2008, it kept Mark Mulholland awake at night.

Mulholland, the founder and sole manager of the mutual fund — named after a Bible passage — says he would lie in bed thinking about the damage he had done to his investors, particularly the elderly whose nest eggs might not recover before they died. The assets he managed dwindled to $22 million from $115 million.

What Mulholland didn’t worry about were the stocks in his portfolio.

“The companies we owned were so cheap that, barring a total collapse of the economic system, I knew at some point we were going to make a lot of money,” he says.

That time has come. Mulholland, 53, bought Apple in 2008 for $80 to $128 a share. He also hung on to his investment in companies such as Sidney, Neb.-based Cabela’s, a retailer of hunting and fishing products, and Polaris Industries, which makes all-terrain vehicles.

Mark Mulholland is the founder and sole manager of Matthew 25 Fund. (Mackenzie Stroh/MACKENZIE STROH/BLOOMBERG MARKETS)

The rebound in those stocks helped propel the now-$452 million fund to gains that beat the Standard & Poor’s 500-stock index by a wide margin. The fund returned 13.1 percent annualized during the five years ended on Feb. 15 compared with 4.7 percent for the S&P 500. Matthew 25 gained 26.8 percent over three years and 25.4 percent in one year.

Those results make Mulholland’s fund No. 1 in the U.S. diversified-stock category in Bloomberg Markets magazine’s annual ranking of mutual funds.

“Mark is the best investor around that no one has ever heard of,” says Steven Roge, a financial adviser who owns shares of the fund.

The ranking of stock and bond funds includes U.S.-domiciled funds with more than $250 million under management as of Feb. 15. Funds are ranked by total returns for one, three and five years and by their Sharpe ratios for three and five years. The Sharpe ratio measures the performance of a fund adjusted for risk. Each of the five measures is given equal weight.

Like Mulholland, the managers of other winning funds in the ranking capitalized on the steep decline in 2008 and 2009 by loading up on a range of investments, from home-building and bank stocks to risky mortgages.

For Chuck Myers, manager of the $5.3 billion Fidelity Small Cap Discovery Fund, the biggest bargains were home builders, which in 2008 were selling for less than the value of the land on their balance sheets, he says. Buying them helped Myers’s fund secure the top spot in the small-cap equity category, with a 25.8 percent return for one year and an average return of 15.6 percent over five years. The fund was also No. 2 in diversified U.S. equities.

“I wanted to position myself in stocks that were the cheapest possible compared to normal earnings,” says Myers, 37. The rally in stocks, with the Dow Jones industrial average exceeding its 2007 all-time high in early March, has reduced the number of such companies, he says.

Investors rewarded Small Cap Discovery with $1.3 billion in new assets in 2012. In January, Fidelity closed the fund to new investors.

International stocks followed their U.S. counterparts skyward beginning in 2009, helping Bill Nygren’s $785 million Oakmark Global Select Fund tie for No. 1 in the global equities list.

“We knew it was not a question of if but when the global economy would recover,” says Nygren, 54, who runs the fund with David Herro.

That recovery helped Oakmark investments such as luxury-car maker Daimler and Daiwa Securities, Japan’s second-biggest brokerage.

The Oakmark fund gained an average of 9.4 percent annualized over five years and 17.7 percent for the year ended Feb. 15. The $5.3 billion Old Westbury Global Small & MidCap Fund shared the No. 1 spot in global equities, with an average five-year return of 9.3 percent.

Nygren, who focuses mainly on U.S. companies, and Herro, an international specialist, each contribute ideas to the Oakmark fund, which holds about 20 stocks. The fund had 16 percent of its money in bank stocks as of Dec. 31.

“We think this is still one of the cheapest sectors out there,” Nygren says.

For bond fund managers, there was no more lucrative investment than the mortgage securities whose collapse brought the financial system to its knees in 2008.

Daniel Ivascyn, manager of the $25.2 billion Pimco Income Fund, had the best results in the U.S. bond category by investing in both mortgage-backed securities and bank loans. The fund returned 12 percent a year for the past five years, outpacing the Barclays U.S. Aggregate Bond Index, which gained 5.6 percent annualized.

Ivascyn’s No. 1 ranking also beat Bill Gross, his Pacific Investment Management Co. colleague, whose Total Return Fund averaged 7.72 percent during the period.

Ivascyn generated some of his best returns by buying mortgage debt that didn’t have the backing of the U.S. government through companies such as Fannie Mae. The debt returned more than 20 percent in 2012. Ivascyn focused on mortgages tied to the low-priced homes that are being bought up and rented out by institutional investors.

The fund attracted more than $12 billion last year, roughly tripling its assets. Ivascyn, 44, has a message for those just coming to the fund. “Fixed-income investors in general need to be comfortable with lower returns going forward,” he says.

Bloomberg Markets also ranked the fastest-growing exchange-traded funds, with the iShares JPMorgan USD Emerging Markets Bond Fund topping a list dominated by funds in which investors seek yield above what they can get from U.S. Treasurys by buying international stocks and bonds and niche funds like real estate.

Mulholland achieved his results without much help. He handles all of the investment chores at Matthew 25 — a task made easier by the fact that he typically owns fewer than 25 stocks and has a buy-and-hold philosophy. He has two part-time staffers to handle administrative chores.

Mulholland works out of an office in Jenkintown, Pa., north of Philadelphia, that is close both to his house and to the Roman Catholic church he visits twice a day to pray. The fund is named for a chapter in the New Testament Gospel of Matthew whose message of hard work and humility Mulholland finds inspiring.

Mulholland’s management of his fund is strictly secular. He ranks companies with letter grades, A to F, in four categories: quality of the business, quality of management, financial strength and price. For a new stock to make it into the portfolio, it has to have a higher cumulative grade than an existing holding, he says.

Mulholland can be effusive about his favorite stocks. Speaking about Polaris, he says: “I love the company. I love being part of the business.”

Polaris was up 12-fold from March 2009 to March 2013. Matthew 25 has owned Polaris since 1998 and Warren Buffett’s Berkshire Hathaway since 1996.

While Mulholland pays attention to the economy, he doesn’t use it as a tool to pick stocks. “Economics can tell you where you are, but it has no value in telling you where you are going,” he says.

Mulholland pays more attention to the stock market, and he likes what he sees.

“I am currently very bullish and have been since 2009 because earnings are growing, prices are undervalued and sentiment is bearish,” he wrote in a year-end letter to shareholders.

Mulholland backed up that opinion by putting more of his own money in the fund early this year. As of mid-March, he says, he and his wife owned 224,000 Matthew 25 shares — worth about $5.5 million.

— Bloomberg Markets

The full version of this Bloomberg Markets article appears in the magazine’s May issue.