An IPO of Great Value Funds
03/19/2008 12:00 am EST
Tim Middleton, columnist for MSN Money, says that several closed value funds run by great managers have reopened to the public, offering a rare opportunity.
The reopening of a hugely successful mutual fund is like an initial public offering for the Everyman—an opportunity to buy into a run-up before the mob. To have nearly a dozen reopen within weeks of each other is an exclamation mark on the invitation.
Jean-Marie Eveillard, the manager of two of the reopened funds, could have been speaking for all of them when he said, "At a time when Mr. Market is quickly swinging from fear to greed and back, major investment opportunities may lie ahead."
The crème de la crème of the recently reopened funds include:
- Dodge & Cox Stock (DODGX). Over the past 15 years, [it has] ranked among the top 1% of similar funds.
- First Eagle Global (SGENX) ranks in the top 1% over 15 years. [It is managed by] Eveillard.
- Longleaf Partners (LLPFX) ranks among the top 2% of its large-cap category over 15 years.
Among funds with only slightly less distinguished records to reopen are Tweedy, Brown Global Value (TBGVX), which has gone up more than 20% in three of the past five years, and Third Avenue International Value (TAVIX), an exceptionally low-risk portfolio that nevertheless has spurted an average of more than 20% each year over the past five years and this year, as of February 27th, was beating foreign-stock benchmarks by seven percentage points.
What all the funds have in common is a bias towards value investing. Over long periods, the value style of investing significantly outperforms the growth style because it is riskier. Over the past 15 years, Vanguard Growth's 9.7% annualized return is 1.4 percentage points behind Vanguard Value's 11.1% advance.
Growth companies have steady, predictable earnings. Value stocks are highly cyclical, and the group tends to be top-heavy with financials, which have been poisonous of late.
What managers such as Longleaf's Mason Hawkins and Staley Cates are saying is that the bear market in value stocks has reached such extremes that they are eager to attract fresh assets to snap up bargains they are finding.
Indeed, the $13-billion Longleaf Partners Fund announced that it is reopening only temporarily. In a statement, it said Hawkins and Cates "have identified investment opportunities totaling approximately $1.5 billion between new investments and existing holdings that are significantly discounted. The Fund will re-close when cash inflows can no longer improve the Fund's opportunity set."
Novice investors flock to mutual funds that are closing and dump them when they slump, as they inevitably do. Doing the opposite, however, is a much likelier path to the creation of real wealth. I think the probability approaches 100% that three years from now, these newly reopened funds will have left last year's sexiest growth funds in the dust.