Top Investors: How They Beat a Scary Market

BusinessWeek asked successful portfolio managers how they navigated a nasty recession and financial crisis

By Ben Steverman

Hardly anyone predicted the size and scope of the recent market meltdown. At the depths of the crisis, which started in 2007 and continues today, there was almost no place for investors to hide.

Still, some investors protected their portfolios far better than others at a time when the concept of investment risk seemed to take on a new dimension. BusinessWeek talked to these investing pros in search of their secrets to success.

The bottom line: There was no simple solution. Successful investing strategies in the past couple of years represented a wide range of philosophies and investment choices. Yet nearly all these top investors, relying on years of experience, sought out only high-quality investments, and many of them were aware of financial and housing difficulties early.

Who Dodged a Bullet?

Which pros managed to sidestep the worst of the market mayhem? What were their strategies? Here's a look:

Ann Benjamin and Thomas O'Reilly, Neuberger Berman High Income Bond Fund (LBHBX)

For Benjamin and O'Reilly, investing is about keeping an eye on the big picture. In 2005, their Neuberger Berman High Income Bond Fund pulled out of bonds exposed to the overheated housing market.

They didn't predict a big housing crash, Benjamin says, but "we thought there was significant oversupply being built in the market."

In 2007 they lightened exposure to more cyclical industries—the sort that would be hurt by the coming recession. "You have to be ahead of the curve," O'Reilly says. "You can't sell on the news." Rather, you need to anticipate the news.

Last year was tough on high-income bond funds, but the Neuberger Berman High Income Bond Fund fell 19% in 2008, beating its Morningstar (MORN) category by 22.5 percentage points. The fund is rated five stars by Morningstar.

Benjamin and O'Reilly are looking ahead, trying to predict the market and the economy's next moves. Fearing the economy could keep dragging longer than predicted, they carefully examine companies to make sure their investments "make it through the cycle," Benjamin says.

Rich Gates, TFS Market Neutral (TFSMX)

By contrast, Rich Gates doesn't shift approaches depending on his predictions of the future. His TFS Market Neutral fund has used the same quantitative strategy since it was started five years ago. It's an approach similar to the hedge fund strategies TFS has run since 2001.

This U.S. equity fund fell just 7.3% in 2008, beating the broad Standard & Poor's 500, which dropped 37.2%, and doing 7 percentage points better than its Morningstar category.

The fund protects assets not just by buying stocks, or going "long," so the fund benefits when prices rise. It also shorts other stocks, by borrowing shares and selling them so the fund benefits when prices fall. The fund stays three-fifths in long positions and two-fifths short.

The fund's computers automatically rank equities according to consistent (and proprietary) criteria, seeking out stocks to buy and short for a few days or up to a month. The shorting strategy limited losses in a tough year, but TFS has also chosen the right stocks to outperform the market in good years like 2006. "It's definitely harder in an up market than a down market," Gates says.

Eric Cinnamond, Intrepid Small Cap Fund (ICMAX)

For Cinnamond, investing starts with close examination of individual companies. "We're just focusing business by business," Cinnamond says. The Intrepid Small Cap Fund buys a stock if it is a "good business"—with a strong balance sheet and consistent cash flow—and if it's priced 20% less than Cinnamond thinks it's worth.

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