Here are some new investments that those saving for or living in retirement might consider for their...
4 Small Funds with Big-League Strength
08/02/2011 8:30 am EST
These are some of the smallest funds in the Morningstar 500 and they’re being ignored by fund investors, but they’ve really got a lot to like, observes Russel Kinnel of Morningstar FundInvestor.
Queens Road Small Cap Value (QRSVX)
Manager Steve Scruggs has done a great job of deep-value investing at this fund, as its four-star Morningstar Rating indicates.
He’s produced great results since the fund was launched in 2002. Its return on $10,000 since that time is $25,500, versus $20,100 for the average small-value fund. Yet, with an asset base of just $57 million, the fund has plenty of flexibility to buy the neglected small-cap names it covets.
Scruggs looks for companies dominating their niche, such as publisher Scholastic (SCHL), and throwing off a lot of cash. Interestingly, that has led him to a sizable tech weighting—27% of stocks—and a light financials weighting (10% of stocks).
However, Scruggs is buying cheaper, more-mundane tech stocks than those such as Google (GOOG). He owns Tech Data (TECD), a big distributor of hardware and software to information technology departments, and Hurco (HURC), which makes software and systems for metal cutting.
Ariel Focus (ARFFX)
This mutual fund was launched in 2005 and it is still just a $51 million fund, but it’s no dog.
Charles Bobrinskoy and Tim Fidler apply Ariel’s approach to large caps. As the name makes clear, they are keeping the fund in a concentrated basket of 24 stocks.
Can Ariel’s emphasis on stable, low-valuation companies work in a focused large-cap fund? I think so.
The emphasis on stability has kept volatility roughly in line with other large-blend funds despite the concentration. Moreover, large-cap stocks appear to be relatively cheap these days, so it’s a strategy that should work well.
Interestingly, the portfolio of fiscally strong but cheap stocks held up much better than did Ariel (ARGFX) and Ariel Appreciation (CAAPX) in 2008, yet they still enjoyed strong performances in 2009 as well.
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Masters Select Focused Opportunities (MSFOX)
Now, this fund really counts as contrarian. It has a Morningstar rating of one star, and its 20-stock portfolio has added up to high risk even though its picks come from three different firms plying three very different strategies.
That diversity of strategies is supposed to tone down the volatility of a focused portfolio, but the three firms have collectively leaned heavily toward financials and energy, two of the market’s more volatile sectors.
If you’re still reading, here’s why this fund is a pretty good bet: Chris Davis and Ken Feinberg are excellent managers who just went through their worst three-year stretch on record. That’s not likely to happen again.
I also like Mutual Series’ Philippe Brugere-Trelat and Peter Langerman. They’re seasoned investors who bring a welcome note of conservatism to the fund.
Finally, the third sleeve is run by Frank Sands Jr. and Michael Sramek of Sands Capital. The pair runs a low-turnover high-growth strategy that has had a headwind for most of the past ten years. That’s not likely to continue, and this fund could well have a bright future.
My only gripe is that the expense ratio is on the high side, but it can come down with asset growth.
WHG Balanced (WHGBX)
This fund has a mere $11 million in assets and a two-star rating, so it’s understandable that people would pass it over, but there’s more here than meets the eye.
The fund has been around since 2006, but a virtual clone, GAMCO Westwood Balanced (WEBAX), dates back to 1991, and Mark Freeman and Susan Byrne have a strong record over that period.
Moreover, it’s conservatively positioned with high-quality stocks and high-quality bonds. That’s meant the fund lagged its peers in recent years, but it could be set to pop when the market’s seemingly insatiable appetite for risk vanishes.
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