This global fund No. 1 — and you probably never heard of it

Mutual-fund manager Frederick “Fritz” Reynolds lives in Maui, Hawaii, and Las Vegas. The Maui home was his choice. He decided to buy in Vegas earlier this year partly because he couldn't pass up the gleaming one-bedroom apartment overlooking the Strip that was being offered at a 75 percent discount from the price it would have sold for four years earlier, Bloomberg Markets magazine reports in its October issue. Reynolds, 69, spends most of his time finding bargains in stocks, not real estate. His Reynolds Blue Chip Growth Fund (RBCGX) tops Bloomberg Markets's annual ranking of mutual funds that invest mainly in the U.S. The fund returned 39.2 percent for the year ended on June 30 and an annualized 14 percent over five years. The five-year performance beat 99 percent of rivals and trounced the Standard & Poor's 500 Index's 2.9 percent annualized return during the same period, according to data compiled by Bloomberg. Among Reynolds' prescient recent picks: Apple Inc. (AAPL), the American depositary receipts of Chinese Internet search company Baidu Inc., heavy-equipment maker Caterpillar Inc. (CAT) and Costco Wholesale Corp. (COST) Those companies' total returns ranged from a low of 33 percent (Apple) to 106 percent (Baidu) in the year ended June 30. When he's in Hawaii, Reynolds wakes up at 3:30 a.m. to follow U.S. trading. He says he invests in companies such as Cupertino, California-based Apple and Beijing-based Baidu because they're betting on expansion in developing markets. “With the growth of China and India, we want to own what China owns, buy what China buys,” Reynolds says. Buying What China Buys He's the lone portfolio manager at Reynolds Capital Management. Blue Chip Growth, with $260 million under management as of June 30, is its only fund. The Bloomberg Markets ranking includes U.S.-domiciled funds with more than $250 million. 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. Bloomberg Markets also ranked exchange-traded funds, which often track indexes, according to the growth in their assets over three years. The No. 1 fund in that ranking is First Trust Consumer Staples AlphaDEX, whose assets grew from $3 million on June 30, 2008 to $155 million three years later. The fund is run by Wheaton, Illinois-based First Trust Portfolios LP. Old Westbury The No. 1 mutual fund in global equities is Old Westbury Global Small and MidCap Fund (OWSMX), a quantitative fund whose managers include Karen Umland and Joseph Chi. The fund gained 37.7 percent for the year ended on June 30 and an annualized 9.8 percent over five years. Taking the No. 2, No. 3 and No. 4 slots in global equities were funds run by David Iben of Nuveen Investments Inc., who invests heavily in gold and natural resources stocks. The No. 1 fund investing in emerging-market equities is Fidelity Advisor Emerging Asia. The top fund for U.S. small-cap stocks is Intrepid Small Cap, run by Intrepid Capital Management. Winners such as Reynolds are still too scarce for many U.S. investors, who were shocked by two bear markets in the first decade of this century. Investors pulled $51 billion more out of U.S. equity funds than they put in during the 10 years ended on May 31, according to data from the Investment Company Institute in Washington. In the year ended on June 30, equity funds were hit by net withdrawals of $79 billion. Investors have instead put their money in bond funds and overseas stocks. Bond-fund assets rose by $1.1 trillion during the past decade, ICI data show. 2008 Is the Key The top-ranked bond-fund managers shunned risk to beat their competitors. The most important driver of their five-year performance was how they handled the credit-market crisis in 2008. Funds from John Hancock Funds LLC, owned by Toronto-based Manulife Financial Corp. (MFC), took the No. 1 and No. 3 slots in global bonds. Both funds are managed by a team led by Daniel Janis. The top-ranked $2.2 billion Strategic Income Opportunities Fund, which has more than 40 percent of its portfolio invested outside the U.S., returned 15.5 percent in the year ended on June 30 and an annualized 9.8 percent over five years, Bloomberg data show. It suffered a below-average loss of 8.4 percent in 2008. “In 2008, it wasn't as much what we owned as what we didn't own,” says Janis, a former foreign-exchange trader at Morgan Stanley (MS), whose co-managers are Thomas Goggins and John Iles. “We didn't own credit-default swaps, we never owned subprime, no financials, no auto and no local emerging-market debt.” High Yield Wins The fund today owns no U.S. Treasuries, and about 35 percent of its U.S. holdings are in high-yield corporate securities. Its biggest overseas holdings are in Canada and Singapore. Janis says the fund sidestepped the sovereign-debt crisis in Europe by moving away from the bonds of Greece, Ireland, Italy and Spain. “Three years ago, we made a conscious decision to stay out of peripheral Europe,” he says. “Greece and some of the others were undisciplined in spending then. They're the same way now.” The No. 2 global bond fund is Michael Hasenstab's $59 billion Templeton Global Bond Fund; his fund was No. 1 in 2009 and 2010. The fund, owned by San Mateo, California-based Franklin Resources Inc., rose an annualized 12.1 percent during the past five years. As of June 30, Hasenstab had 44 percent of the fund's money invested in Asian bonds, excluding Japan, with 15 percent of it in South Korea. In Europe, his fund has stayed away from the riskiest debt to focus on bonds in Sweden and Poland. Betting on Poland “Growth in Germany has been a big boon to countries such as Poland,” Hasenstab says. “We also like the fact that Poland and Scandinavia run responsible fiscal accounts.” Five of the top 10 U.S. bond funds invest in high-yield securities, which rallied in 2009 and 2010 after steep declines during the 2008 credit crisis. The No. 1 Columbia Income Opportunities Fund (AIOAX), managed by Brian Lavin in Minneapolis, invests only in securities rated B or higher. “Part of our outperformance is the structural nature of the fund, because we avoided CCCs, and that really helped in 2008,” Lavin says. Fritz Reynolds is the first to admit that his record is not unblemished. His Blue Chip Growth Fund was a heavy investor in technology and Internet stocks in the late 1990s. After tripling in value from 1997 to 1999, the fund plunged 69 percent from 2000 to 2002. His firm's assets tumbled to $26 million from a peak of $850 million in 1999 as losses mounted and investors fled. ‘What Did I Do Wrong?' “I felt terrible and blamed myself for days and months,” Reynolds says. “For me, the big question was, what did I do wrong and how can I make sure it never happens again?” Reynolds overhauled his investment process, spreading his bets over a more diverse selection of companies and industries. The Blue Chip fund now holds shares in more than 1,000 companies. In choosing stocks, he raised his weighting of technical factors such as trading patterns and volume to 25 percent from 10 percent. Most important, Reynolds declared he would flee from any market that began to look like a bubble. He did so in dramatic fashion starting a week after the S&P 500 hit its bull-market high of 1,565.15 on Oct. 9, 2007. After concluding that the housing market was grossly overpriced and that its collapse would ripple through the broader economy, he moved 93 percent of his fund into cash over three months. Cashing In Reynolds stayed mostly in cash until the stock market trough in March 2009, unrepentant even as industry watchers heaped criticism on him for earning fees while making no investments. “I was called a money-market fund in disguise,” he recalls. “A columnist gave me a ‘lump of coal' in his annual mutual-fund ratings.” Reynolds's move helped limit his fund's losses to 5 percent during 2008 as the S&P 500 plunged 38 percent. Reynolds first enrolled in the chemical engineering program at the University of Wisconsin-Madison and switched after two years to finance. He then went on to get a Master of Business Administration from the same school. He started his investment career at the money-management unit of American Express Inc. in the late 1960s. After a stint at Robertson, Colman & Siebel, which became Montgomery Securities, he started his own firm in 1985. ADR Wager Today, Reynolds is again fully invested in stocks and is trying to benefit from global growth. He has increased his exposure to the ADRs of non-U.S. companies to about 13 percent from 5 percent in 2000. Reynolds is confident that his revamped investment process will help him avoid the errors that sent his fund into a tailspin 10 years ago. “I'm treating what happened back in 2000 as an aberration,” Reynolds says. “I've learned from my mistakes.”