Fund Family Soars in Tough Times

NEW YORK (TheStreet) -- James Small Cap (JASCX) has been on a tear. During the past year, the fund returned 10.9%, ranking as the top-performing small, value fund, according to Morningstar. James outdid the No. 2 finisher by 5 percentage points.

The strong showing can be attributed partly to luck. James prefers stocks with solid earnings, which have been in favor lately. But the fund has delivered successful returns in a variety of market conditions. During the past decade, James Small Cap returned 8.8% annually, outdoing 86% of competitors. James Balanced: Golden Rainbow (GLRBX), which holds many of the same stocks as the small-cap fund, also boasts a strong record. During the past decade, the balanced fund returned 7.4% annually, outdoing 98% of its peers in Morningstar's conservative allocation category.

The James funds follow a strategy developed by Frank James, who founded James Investment Research and now runs the company along with his son Barry. For his Ph.D. dissertation in the 1960s, Frank sought the Holy Grail of investing: a simple system that could pick winning stocks.

While James never found a perfect solution, he did notice a helpful phenomenon. When a stock outperformed the market for more than a year, odds were good that it would continue topping the benchmark for the next six months or so.

Over the years, other researchers have reported similar findings. As a result, a number of funds now emphasize stocks that have been showing strong relative strength or momentum. But the approach has never been widely used because it can fail during downturns.

"When the market corrects, the first things to go down are stocks that have been doing the best," Barry James says. "When they see the bad results, people think that relative strength doesn't work. But relative strength can be helpful if you understand when it works."

Since the strategy is not foolproof, the James managers combine relative strength with other indicators. For Barry James, the ideal stock has good relative strength, solid earnings and a low price. Because stocks that meet all the criteria are rare, he also takes shares that have only some of the desirable attributes. The resulting portfolio changes over time, landing in the value box some years and at other times fitting in the blend category.