Bill Miller's Legg Mason Opportunity fund is out. FPA Crescent is in. By Andrew Tanzer, Senior Associate Editor December 8, 2008 Let's hope it happens only once in a generation, if not once in a lifetime. Over the past year, virtually nothing has worked for investors. U.S. stocks, foreign stocks, commodities and nearly all kinds of bonds have been hammered. There's been no place to hide.So it's time to revisit the Kiplinger 25, the list of our recommended mutual funds. With precious few exceptions, they have felt the full fury of the markets' plunge. Because our list didn't include any balanced funds or other hybrids (in order to make it easier for readers to assemble portfolios without mucking up their asset allocations), none of our favorite stock funds owned enough bonds or cash to insulate them from the horrible market decline. But one domestic fund performed notably worse than the others: Bill Miller's Legg Mason Opportunity. Opportunity shed a mind-boggling 63% over the past year. As a value investor, Miller, whose Legg Mason Value fund once beat the market 15 years in a row, failed to preserve investors' capital for the past two years, a cardinal sin. This is not a question of holding beaten-down stocks that will spring back when the economy and the animal spirits of investors revive. Money that Miller invested in Bear Stearns, Freddie Mac and Countrywide Financial is gone for good. So we have decided to drop Opportunity from our list. We're replacing it with FPA Crescent (symbol FPACX). Manager Steve Romick is one of the best, most disciplined value-investing practitioners in the business. He describes his goal as matching the return of Standard & Poor's 500-stock index while taking on much less risk. In fact, in the 15 years through November 7, his fund returned an annualized 10%, an average of three percentage points per year better than the S&P, with about 25% less volatility. Advertisement Morningstar, which categorizes Crescent as a balanced fund, says it beat 99% of its peers over the past 15 years. Romick makes the most of his flexible mandate by selling short (a bet on lower share prices) when he spots risks that are not reflected in stock prices. And he searches among all types of investments for the best values. For instance, Romick currently sees better value in corporate bonds and bank loans than in stocks. "Either debt is way too cheap, or stocks are too expensive," he says. He recently bought Home Depot bonds yielding 12.3% to maturity in 2009 and bank debt from Michaels Stores yielding 30% to maturity in 2013. Be aware that Romick will hold large cash balances if he finds no value in the markets. As a result, this fund generally lags in bull markets. In the bond column of the Kiplinger 25, the outlier is Loomis Sayles Bond, which had a terrible year. The fund has been an outstanding performer for many years, but it came unstuck as frightened bond investors dumped corporate bonds, whether high-grade or junk. We expect Loomis Sayles, led by Dan Fuss, to rebound. But we emphasize that this fund is much riskier than a core bond fund. For something less volatile, we suggest Harbor Bond, managed by Bill Gross and his team at Pimco, or, for money in taxable accounts, Fidelity Intermediate Municipal Income.