Recently, I discovered the Keeley Small Cap Value fund, which invests in spinoffs. This is a strategy I believe in and tried to follow by investing in individual stocks, but it is tough when you have limited time and limited capital to commit. So Keeley Small Cap Value fund sounds very good, but it is very, very expensive: a front load of 4.5% and an expense ratio of more than 2%. I wonder if you know about any other fund that follows the same strategy but has no load and a lower expense ratio?
-- Roberto Maronese
Investing in spinoffs is a strategy used by many bargain hunters searching for hidden value. Companies that are spun off from parent corporations are frequently overlooked and unloved. When a smaller company is detached from its parent to form a separate public entity, investors in the parent receive shares in the newly formed firm. But not all hold on to these shares.
Frequently, the new firm is too small to meet the investment criteria of the institutional funds that invest in the parent corporation. And many spinoffs go unnoticed because they don't attract the attention of Wall Street analysts since they are not new public offerings. Often, the new firm's business is simply misunderstood, prompting individuals to sell the newly acquired shares. The negative sentiment presents the perfect opportunity for value investors willing to do some legwork to separate the wheat from the chaff.
Unfortunately, the strategy, while sound, is not currently paying off for the fund you mentioned. Not only is
Keeley Small Cap Value expensive, it's also depressed. While the
is up 17.2% over the past 12 months through April 1, the Keeley fund is down 17.1%, according to
. The fund's funk is not surprising since both the small-cap asset class and the strategy of value investing have been out of favor in that time period.
A better way to go might be the $10 million
Transamerica Premier Value
fund which is a no-load fund with an annual expense ratio of 1.2%, far cheaper than Keeley. Transamerica's managers also rely on spinoffs to add value. But unlike Keeley, these managers buy companies of all sizes, not just small-caps.
At no more than a year old, the tiny Transamerica fund is still untested, but its adviser,
Transamerica Investment Services
, is staffed by veteran investors. The San Francisco asset-management firm has more than 30 years of experience in investment management and currently oversees $35 billion in assets. The fund is up 9.5% over the past 12 months. About 30% of its portfolio invested in spinoffs. One such company is
-- the "pickle people." The company sprung from
in March 1998.
"Vlasic was ignored inside of Campbell when some very strong managers at Campbell decided to make it their vehicle for equity wealth and it was spun out," says Chris Bonavico, lead portfolio manager on Transamerica Premier Value. "These managers were particularly good at creating new product growth, and when Vlasic was spun out, they got a lot of options to make it grow. They've got their own money on the line" he says.
Other spinoff plays in the Transamerica portfolio include
Dun & Bradstreet
Kansas City Southern
To find out more about the Transamerica fund, you can check out the firm's Web site at
To look for more funds that own companies you like, try
www.Fund4YOU.com, a free service that allows you to search for funds that invest in your favorite stocks.
Readers, do you know of any more fund managers using the spinoff strategy? Please let us know. How about other investment strategies we might not have heard about? Send email to
firstname.lastname@example.org, and please include your full name. Thanks in advance for your help!
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