Mid-cap blend funds are about as "middle of the road" as you can get. Unfortunately, 2002 wasn't kind to funds in the middle of the road.
Funds in the mid-cap blend category focus on stocks with market capitalization from $1.5 billion to as high as $10 billion, depending on whom you ask, and rather than committing to value or growth strategies, they try to get a blend of both. The past five years have seen extreme gaps in performance between mid-cap growth and mid-cap value. Thanks in large measure to the collapse on the growth side of the aisle, mid-cap blend funds had their worst year since 1974, according to Morningstar, skidding 17%.
This week's Five Winning Funds highlights funds that have rode the highs and the lows of the past few years. While the blend funds that made the list lean a bit toward value-conscious fund managers, that might not be a bad thing: Mid-cap value, over the long haul, outpaces mid-cap growth by about 4.7 percentage points a year,
according to Ibbotson. And they offer investors a healthy dose of growth for when that side goes on a tear.
Without further ado, here are Five Winning Funds for the mid-cap blend category. As usual, those folks who like the low costs and market-matching comfort of index funds can check out the Indexer's Choice offering at the bottom.
1. (SYMBOL) Mosaic Mid-Cap
Sure, everybody says they love Warren Buffett now. But Buffettologist Rich Eisinger never wavered in his devotion, and the proof is in the pudding at his Mosaic Mid-Cap fund.
This no-load fund, run by Eisinger and co-managed by Jay Sekelsky, could be fairly described as modest: A modest $26.2 million in assets, a modest 1.24% expense ratio, a modest 30-odd companies in the portfolio. But the fund's returns can't be characterized as modest: The fund's three-year average annual return of 8.54% and five-year average annual return of 5.05% rank in the top 3% and 10%, respectively, among all mid-cap blend funds. (
In this recent 10 Questions interview, Eisinger was rather modest about the fund's stellar returns.)
Mosaic Mid-Cap's longer-term performance isn't as solid, but don't blame Eisinger and Sekelsky. Mosaic parent Madison Investment Advisors acquired the fund in late 1996, Eisinger came on board in mid-1997, and "it didn't really have our ideas until January 1998," Eisinger said.
The strategy reads very much like Warren Buffett's playbook: Find companies with a sustainable competitive advantage, clean books, predictable earnings growth and, of course, a reasonably priced stock. Since not many companies have all these coveted attributes, Eisinger sticks to 25 to 35 companies, such as specialty insurer
, furniture retailer
and, you guessed it,
. While this makes it sound like Mosaic Mid-Cap is a value fund, Eisinger dubs it a "growth at a reasonable risk" fund, which has recently led him to scoop up
2. (FEAFX) - Get Report First Eagle Fund of America
If fund investors are familiar with First Eagle Funds at all, it is probably as the shop that houses
Jean-Marie Eveillard, the affable Frenchman and Rukeyser regular who has adroitly managed four successful funds. But the firm has other selling points, most notably this solid mid-cap blend fund co-managed by Harold Levy and David Cohen since the late 1980s.
The $490 million, no-load First Eagle Fund of America has been a beacon of consistency and positive returns in the mid-cap blend arena: Its 7.2% decline in 2002, thanks in part to exposure to
, marked the worst loss in the fund's 16-year history. Its three-year average annual return of 4.9% places it in the top 10% of its peers, and its 10-year average annual return of 13.26% places it in the top 1%.
Long-time skippers Levy and Cohen employ a bottoms-up approach to stock picking, hunting for stocks that look undervalued. They aren't afraid to take risks, as evidenced by the recent addition of
One caveat: The fund's 1.51% expense ratio is a little above the category average 1.43%. The Y class doesn't carry any load, so interested investors should look for those shares using ticker symbol FEAFX.
3. (MVALX) - Get Report Meridian Value
The $1.23 billion Meridian Value fund, or MVALX, isn't a pure mid-cap blend fund -- managers Kevin O'Boyle and Richard Aster Jr. dip into large- and small-cap stocks to find out-of-favor companies that look poised to recover. But since mid-caps constitute about 50% of the fund, the best category fit for Meridian Value is mid-cap blend -- and it merits inclusion on the list.
Performance is the big selling point at the fund: The five-year average annual return of 13.32% places it in the top 1% of all mid-cap blend funds, according to Morningstar. While the fund's value leanings meant it trailed its average peer during a few years in the 1990s -- back in 1997, a 21.4% return was underperforming -- it has held up remarkably well on the downside. Its 5.04% average annual return over the past three years places Meridian Value in the top 7% of its peers. And its 13.4% loss in 2002 -- its first down year in its nine-year history -- beat 71% of its peers.
How have O'Boyle and Aster -- at the fund since 1995 and 1994, respectively -- done it? Finding stocks that look cheap to them, such as
, and spreading their bets among 75 or so companies.
The fund's annual turnover ratio of 54% helps keep costs down; the fund's expense ratio is a below-average 1.12%.
4. (CAAPX) - Get Report Ariel Appreciation
Normally, Five Winning Funds shies away from including a fund with a relatively new manager. But in the case of the $1.39 billion Ariel Appreciation fund, an exception is justified.
John Rogers Jr. took the reins of this fund in September 2002 from Eric McKissack, who managed to notch impressive returns while at the helm. Rodgers is the founder of value-oriented Ariel Capital Management and the long-time skipper of the firm's eponymous stellar small-value fund, which should placate smart investors who seek an experienced hand at the wheel.
Ariel Appreciation, which hunts for mid-cap stocks trading at a steep discount to the market, has notched three-, five- and 10-year returns in the top fifth of all mid-cap blend funds. While past results are no guarantee of future success, especially when a new manager comes aboard, Rogers certainly inspires a great deal of confidence.
The no-load fund's buy-and-hold approach has offered slow but steady returns -- the firm's trademark is a tortoise, after all. Turnover is a mere 13% and its expense ratio is 1.26%.
5. (FAIRX) - Get Report Fairholme Fund
The relatively new $51 million Fairholme is a quirky fund that is not for everyone. But its eye-popping returns make it one worth watching.
Co-managers Bruce Berkowitz and Larry Pitkowsky do more than emulate Warren Buffett -- they put nearly 25% of the fund's assets in the Sage of Omaha's
stock. That massive stake has helped the fund lose a mere 1.6% in 2002 and return 12.08% a year during the past three years -- good for a No. 1 ranking, according to Morningstar.
The fund also adheres to a Buffett-like investment philosophy, which has recently led it to
. The expense ratio is a trim 1%.
What's the catch? Well, its newness, first off. The fund has only been around since Dec. 31, 1999 -- giving investors a limited window to analyze performance. Also, the huge exposure to one company -- even one of the best-performing companies of the past 35 years -- leaves it closely tethered to one company's fate. But if the investor understands the limitations of the fund, it might make an appealing side bet for those who can't afford to buy Berkshire shares -- its just not a core mid-cap holding.
For the investors who want to get broad, inexpensive exposure to the entire mid-cap universe, there is no shortage of index mutual funds.
Vanguard Mid-Cap index, or VIMSX, which recently switched its benchmark index to MSCI U.S. Mid-Cap 450 index from the S&P 400 Mid-Cap index. Vanguard's offering sports a 0.26% expense ratio and has topped 69% of its peers during the past three years.
Other solid mid-cap index funds offerings include the
Dreyfus Mid-Cap Index fund and the
Federated Mid-Cap Index fund.