Editor's note: This is the second of five stories looking at the past year and at the year ahead in mutual funds and exchange-traded funds. The first story looked at real estate funds that crashed and burned in 2007.

A common refrain in my articles about new investment products is that you need to give them time to prove themselves in the market before buying.

Well, I recently took another look at a quirky product from the Internet era that I find intriguing. You may remember that, during the venture capital boom of the late 1990s, one of the VC firms came out with a product that was intended to make this kind of investment accessible to all through the public market: the

(MVC) - Get Report

MVC Capital Fund (formerly known as the ME VC Draper Fisher Fund).

The fund has a long and eventful track record. The launch was poorly timed, and performance stalled for a few years as shareholders and management quarreled over the fund's structure and what to do with the capital raised.

Fast forward a couple of years and those problems seem to be behind the fund: a restructuring in 2003 allowed MVC to expand its investment mandate away from a narrow focus on tech start-ups. It has yielded results that do not seem to correlate to anything.

I compared the correlation of MVC with all sorts of asset classes that I think could be important for investors to learn about, along with a couple of standbys, and found low correlations (according to PortfolioScience.com). See the table below for details.

This is important because it can help manage the risk in your portfolio. You have probably read how David Swensen manages the Yale endowment or how Jack Meyer used to run the Harvard endowment; they wove together disparate asset classes with low correlations to each other in a way that created stock market-beating returns, usually with less volatility than the market.

MVC is a closed-end fund; it has a fixed number of shares that trade on an exchange. It is expensive as these products go, with an expense ratio of 3.25%. It currently trades at a premium of 5% to the value of its holdings (and that's very low relative to where it has been over the last couple of years). It yields 3%.

The fund makes long-term investments, via equity or debt, "to fund growth acquisitions and recapitalizations of small- and middle-market companies." That is a pretty broad mandate, which is a good thing. A product like this with an overly restricted mandate would be less appealing.

The current holdings is a long list of things you likely have never heard of, ranging from medical devices companies such as

Ohio Medical

, pipeline manufacturers like

Custom Alloy

, research labs and equipment makers such as

Genevac

and

HuaMei Capital

, a Chinese M&A firm, among others.

The returns over the last few years have been outstanding compared to a common benchmark like the

S&P 500

. Year to date, MVC is up 22.7% compared with 4.3% for the

Spyders

(SPX)

. In 2006, MVC was up 24.9% vs. 13.6% for SPX; in 2005, MVC was up 17.9% while SPX was up 3%.

I find all of this compelling. Clearly over the last few years the managers have chosen wisely and added value. It should be obvious that buying this fund boils down to faith that its track record will continue.

Really with any sort of actively managed product you are deciding whether you think the past will repeat itself. There is no way to analyze what decision an active manager will make in six months or at any other point in the future.

Market-Beating Performance
MVC vs the S&P 500

Click here for larger image.

Source: BigCharts.com

As the above chart shows, MVC can be volatile. It stands to trade differently from something like the

PowerShares S&P 500 Buy Write Portfolio

(BPB)

that I

wrote about last week. And clearly the correlation goes up during times of market crisis (as is often the case).

I recently bought this for clients, but at only a 2% weight in the portfolio, in the hopes that over the long term it reduces the correlation of the entire portfolio to the S&P 500 and that it continues to add basis points to the overall portfolio return.

Coming up next: Actively managed ETFs.

At the time of publication, a client of Nusbaum's was long MVC, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;

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to send him an email.