03/25/2005 12:00 am EST
Richard Band is a long-term value investor par excellence. While he usually focuses on large, well-established holdings, his latest picks are two "pint-sized" funds, which he recommends for their "excellent management and market-beating potential."
"Most of the time, I focus on big, well-established mutual funds, usually with over $1 billion assets. Typically, they’re the outfits with the most talented portfolio managers and the deepest research capabilities. On the other hand, I’m always on the lookout for ‘comers’—small funds with excellent management. These are your best candidates for index-beating growth in the years ahead. By adding a smaller fund from time to time, you refresh your portfolio for peak performance. Here are two pint-sized funds I would start accumulating now:
"Fairholme Fund (FAIRX) is managed by Bruce Berkowitz, a dyed-in-the-wool value investor who came out of the money management arm of Salomon Smith Barney, launched this offering in late 1999. Over the past five years, he has achieved stunning, consistent results: up 24.9% in 2004 and 137% for the five-year stretch. (Recall, 1999–2004 was a period when the overall stock market lost money.) Yet FAIRX continues to be largely unknown outside ‘value groupie’ circles. Assets, at last glance, stood at a mere $234 million, leaving ample room for growth before Berkowitz runs out of ideas. I also like Fairholme’s low turnover (13%) and modest expense ratio ($1 a year per $100). My only real caution is that Berkowitz concentrates his bets among relatively few names. But when your largest holding (24% of the total!) is Warren Buffett’s Berkshire Hathaway, how can I complain?
"Polaris Global Value (PGVFX) roams the world for values. Bernard Horn, manager of this $158 million fund, has done an outstanding job of uncovering these values and deserves to be better known. Last year, the fund shot up 23.6%, more than double the return on the domestic S&P 500 index and far ahead of the average global stock fund. For the past five years, the fund has again trounced its rivals with a sparkling 82% return. Like Fairholme, PGVFX follows the tried-and-true formula that has worked for the top-rated value funds over the years: Only buy statistically cheap stocks. Look for businesses with strong balance sheets and a sustainable competitive advantage. Keep your turnover down. In addition, Polaris (unlike Fairholme) is widely diversified, with no single stock accounting for more than about 2% of the portfolio. So there’s less risk that a blow-up at one or two companies might damage your returns. My one concern about PGVFX is the stiff expense ratio (1.75% annually). However, funds with large exposure to foreign markets often carry high overhead. As the fund grows and its fixed costs are spread over a larger asset base, I look for the expense ratio to decline.
"If pressed to choose between Fairholme and Polaris, I would refuse. Split your money evenly between them. Over the next five to ten years. I suspect that both funds will handily beat the market indexes, and one of them may well turn out to be a heroic wealth-builder, even surpassing today’s celebrated giants. Buy FAIRX at $23.22 or less and PGVFX at $15.10. Both are no-load funds (no upfront sales charge), although Fairholme does impose a 2% redemption fee if you bail out after less than 60 days. For Polaris, the redemption fee is 1% before 180 days have elapsed. You can buy either fund through leading discount brokers, but you’ll pay a transaction fee. I’d also note that both funds have a $2,500 minimum."