Morningstar's Value Gems

08/06/2004 12:00 am EST


Don Phillips

Managing Director, Morningstar, Inc.

Don Phillips' Morningstar is the deserved leader in mutual fund information and advice. His firm's rating services and in-depth research make it a must for serious fund investors. Here, analyst Paul Herbert looks at a "trio of value gems that have gone unnoticed."

"Fund investors haven't noticed this trio of value gems. We continue to uncover so many under-appreciated fund offerings. That means that some standout managers at boutique shops have remained relatively unnoticed. Fund investors haven’t noticed this trio of value gems, and flying below the radar has its advantages. We’d also note that staying smaller allows managers to focus assets in their highest-conviction ideas and to trade more nimbly. Each fund below has a small enough asset base to trade without worry of moving stock prices, and also possesses an attractive strategy, solid performance, and other attributes that lead us to believe that they'll turn out to be long-term winners.

"Mid-value funds have been one of the best-performing stock-fund categories in recent years--a fact that has led to a spate of fund closings. Investors simply haven't caught on to Artisan Mid Cap Value (ARTQX), a $144 million offering, despite the fact that it has put up strong returns since managers Jim Kieffer and Scott Satterwhite took the helm in November 2001. The duo looks for companies with ship-shape financial positions that are selling at undemanding valuations, and this strategy has worked like a charm here. Because of its size, the fund has been able to stay true to its mid-cap universe--78% of its assets were devoted to midsize stocks. Artisan has been proactive in closing funds in the past, and while this fund is a long way from capacity, we think the firm will close it before it gets too large.

"The Masters' Select Funds are based on the idea that you can get strong performance by hiring top notch bosses and combining their best picks in a single portfolio. With Masters’ Select Value (MSVFX), a $228 million fund, you get the favorites of well-known value investors Miller, Nygren, Hawkins, and Winters in one stop. Some have called the strategy gimmicky, but this fund has posted strong results relative to their peers over time. And, there are only a handful of shops that are as proactive in closing funds as Litman/Gregory Advisors, this fund's advisor. In fact, we already know that this offering will shut its doors when assets reach approximately $1 billion. That should allow the bosses who prefer to troll small-cap waters for values, including Hawkins and Winters, to carry out the task without much trouble.

"Although its first name is among the most familiar to fund investors, Vanguard Dividend Growth (VDIGX) hasn't garnered much attention. Like many undiscovered funds, folks may have failed to recognize that most of this offering's record was built before the current manager and strategy were in place. Indeed, prior to December 2002, the fund focused on utilities stocks. Since then, new manager Minerva Butler has concentrated on companies that have demonstrated an ability to grow their dividend payouts over time or possess the capability to resume a program of distributing income. While Butler is new to managing a diversified fund on her own, the fund's results have been pretty solid during her tenure. And she can rely on Wellington Management's fine analyst staff, so we aren't too concerned that she lacks a long record. Assets stood at about $871 million recently, which shouldn't prove to be any sort of a handicap given the large-cap fare that the fund owns. As one would expect, it features a bargain-basement 0.40% expense ratio."

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