Welcome back, Joe Investor.
Signs abound that individuals are slowly but surely
getting back into the market. In April, stock funds had inflows of $16.1 billion, according to fund trade group ICI. More recent flow estimates have been bullish, too. The cash avalanche has been a boon to giant fund families such as
T. Rowe Price
, which earlier this week
removed the upfront sales fee on five of its funds in a bid to attract some of that new money.
As the big firms beat the marketing drums to tout their best offerings, this week's Five Winning Funds highlights some great, unsung funds from lesser-known shops. These offerings may not boast ads with handsome retirees smiling at you from glossy financial magazines, but they do boast stellar long-term returns that have made smiling retirees out of investors. (Past performance doesn't guarantee ad model-worthy good looks, alas.)
"There are so many great funds from shops that just haven't been recognized," said Brian Portnoy, a fund analyst for Morningstar who for a few years penned the worthy "Hidden Gems" column for the fund-research firm. "While the big firms have been bringing in a lot of new money, that's not an indication of where the talents are, exclusively."
Digging for solid funds from well-known companies is pretty easy. Digging for undiscovered winners requires a little extra effort -- and this week's column solicited some outside suggestions from Portnoy,
MaxFunds.com co-founder and
guest columnist Jonas Max Ferris and
FundAlarm.com founder Roy Weitz. These savvy fund folks confirmed my opinion on a few funds and also offered a few that were news to me.
Before we get to the list, there are a few points worth mentioning about unheralded funds. First off, if you find a little-known fund that looks intriguing, look closer. Check the fund family's Web site: It's likely to be a small shop, but does it have a steady team of dependable managers and analysts? One of the comforts of investing in an
, Fidelity or T. Rowe Price fund is the deep bench of analysts behind every offering. When investing in smaller fund firms, make sure the management team has tenure, some decent backup from analysts and a stellar long-term record. If you can't find the information, call the firms and ask.
Also, pay close attention to fees and expenses. "All the big companies talk about how important distribution is, but it is a key component to keeping expenses down," said Fund Alarm's Weitz, who notes that a lot of smaller fry have given up trying to sell their funds directly and have added loads, or sales fees.
The big guns may benefit from economies of scale and marketing prowess, but today's list amply demonstrates that they don't have a monopoly on stock-picking acumen. While unsung funds tend to be small- and mid-cap stock funds, we have tried to provide a variety. The funds, through drawn from different asset classes, share a few traits: no loads and low expenses, great long-tenured skippers and tiny asset bases.
Lastly, one nice note about many lesser-known funds: The skippers usually have "skin in the game." Many times, much of their personal wealth is invested in the funds they manage, giving added incentive to deliver the goods.
1. Large-Cap: Mosaic Investors
For folks who discovered Mosaic Funds, the joy experienced is akin to discovering a great band before they hit it big, with one key distinction: Mosaic made a lot of money for its early followers. Headquartered far from the madding crowd in Madison, Wis., Mosaic applies a strict Benjamin Graham-Warren Buffett approach to its funds that has paid off in spades. Given the media attention the shop has garnered in recent months, Mosaic probably won't turn up on any "unsung funds" lists in a year or two.
Meantime, two Mosaic Funds, both co-managed by Jay Sekelsky and Rich Eisinger, turn up on our Five Winning Unsung Funds list. The first is the
Mosaic Investors fund, a large-cap blend fund with a mere $106 million in assets -- no worries here about the fund getting too big to manage its assets.
Mosaic Investors' numbers speak volumes: Three-year average annual return of 1.2% and five-year average annual return of 3.16% rank in the top 3% and 7%, respectively, of all large-cap blend funds, according to Morningstar. The 10-year numbers are stellar as well: Its 10.41% average annual return ranks in the top 12%.
Behind the numbers is another great reason to seek out Mosaic. Since 1997, the fund ranked in the top 10% of its peers in all but two years: 1998 and 1999, when its 18.7% and 5.1% returns ranked in the bottom 30% and 6%, respectively. Given that those two years marked the pinnacle of the large-cap stock bubble, the fund's refusal to run with the momentum bulls stands as a profile in investing courage: Mosaic doesn't follow the herd.
Sekelsky and Eisinger keep about 30 stocks in Mosaic Investors, and big holdings such as
reflect their "growth at reasonable valuations" ethos. The fund is up about 10% so far this year, but it hasn't notched gains on the backs of frothy tech stocks: Aside from
Check Point Software
, there isn't much tech in the fund. If the tech side of this bull rally gives way, Mosaic Investors will be one of the large-cap funds that doesn't feel the sting.
The no-load fund's 0.99% expense ratio is below the 1.27% category average.
Mid-Cap (Tie): Mosaic Mid-Cap and C&B Mid-Cap Value
There are a handful of stellar unsung funds from which to choose in the mid-cap arena, and we settled on two: The $34 million
Mosaic Mid-Cap fund and the $168 million
C&B Mid-Cap Value fund.
Much of the praise for Mosaic Investors applies to the Mosaic Mid-Cap fund: great long-term results, smart stock-pickers at the helm and low costs. The mid-cap blend fund's three-year average annual return of 9.36% and five-year average annual return of 8.54% rank in the top 7% and top 15% of its mid-cap blend peers, according to Morningstar. The fund's 10-year results aren't as impressive, but they aren't germane: Mosaic parent Madison Investment Advisors acquired and renamed the fund in late 1996. (Madison manages billions of dollars in institutional assets and about $300 million in mutual funds.)
The no-load fund's 1.24% expense ratio is below the 1.43% category average. To learn more about co-manager Eisinger's Buffettesque approach to investing,
check out this "10 Questions" interview from February.
The C&B Mid-Cap Value fund has similar virtues: a great long-term record, steady leadership and "great on-the-ground stock-pickers with a knack for finding opportunities," said Morningstar's Portnoy. The fund's management team -- the firm touts on its
Web site its average tenure of 13 years -- hunts for "high-quality, low-risk" stocks for its funds. In the mid-cap value fund, that includes companies such as toymaker
. The managers have also dabbled a bit into tech waters recently, adding a few tech stocks to its 30-some holdings.
The no-load fund's three-year average annual return of 14.9% and five-year average annual return of 12.9% rank in the top 8% and top 3%, respectively, according to Morningstar. The expense ratio is 1.4%.
Small-Cap: FAM Equity Income
"We spend a lot of time warning about bad funds, but
FAM Equity Income is one that turns up on our honor roll," said Fund Alarm's Weitz. (Mosaic and C&B offerings also make the grade.)
The $60 million fund has performed ably since its 1996 inception, racking up one-, three- and five-year returns that rank in the top quartile of its small-cap value brethren. FAM Equity Income posted a modest 2.2% loss in 2002, but its three-year average annual return of 14.47% impresses.
Tom Putnam, founder and chairman of Fenimore Asset Management (the FAM of the fund's title), co-manages the fund with Paul Hogan. The no-load fund, which sports a below-average 1.21% expense ratio, holds a mere 31 stocks. According to FAM's
Web site, the top seven holdings -- among them well-regarded companies such as
-- each constitute more than 3% of the fund's portfolio.
Fenimore -- based in Cobleskill, N.Y., and taking its name from "local" author James Fenimore Cooper -- manages only two funds and isn't too well-known, but you can buy the funds through Fidelity's Fund Network and other big shops.
Asset Allocation Fund: Leuthold Core
A handful of lesser-known funds that have knocked the cover off the ball are asset allocators -- funds that mix their assets between stocks, bonds and cash, depending on the firm's view of the markets. Among the worthy contenders, we chose to highlight the revved-up
Leuthold Core fund.
The $177-million-in-assets fund isn't a staid stocks and bond fund, mind you: It also shorts stocks if the spirit moves its gifted lead manager, Steven Leuthold. Leuthold, who started the fund in 1995, uses a proprietary quantitative strategy that has demonstrated an uncanny ability to divine market changes. Leuthold's firm turned extremely bullish last fall, just in time to ride the surge in stocks such as
( FDRY). And the firm doesn't think this rally is a flash in the pan: In its first-quarter statement, Leuthold noted the firm "continues to see a very attractive stock market," and the fund's 72% stock weighting reflects that bullish stance.
While Leuthold's approach is novel, the proof is in the pudding: The fund's one-year return (11.44%), three-year average annual return (4.2%) and five-year average annual return (7.43%) rank in the top 2%, top 7% and top 2% of its asset-allocation fund peers. The no-load fund's 1.25% expense ratio is a bit below average.
The trick with investing in a fund like Leuthold is figuring out how to incorporate it into a diversified portfolio. Portnoy's suggestion is a smart one: "For an investor with a longer-term time horizon, you can put 20% to 30% of your portfolio in the fund and let Leuthold go wild."
If the fund's $10,000 minimum investment is too rich for some investors' blood, another unsung asset-allocation winner is
FPA Crescent. The $178 million fund has a $1,500 minimum investment requirement, and its three-year and five-year average annual returns ranked in the top 1%.
International: Pictet International Small Company
The Swiss-based Pictet Funds family is big in Europe but not as well-known here. MaxFunds' Ferris recommended the firm's
overseas small-cap stock fund because it's a solid performer in an asset class that investors should consider. "International small-cap is a good asset class for most people because large international funds don't add a lot of diversity," Ferris said. "But a lot of the good ones such as Artisan and Oakmark are closed. Pictet's not as well-known, so it's open."
Until recently, the $24 million fund was only available to folks who could pony up the minimum initial investment of $50,000. But a new share class (PISRX) opened in March 2002 with the same four-person management team, the same holdings and a $2,500 minimum investment.
The no-load fund had a rough 2001, losing 28% and trailing 83% of its peers. But the longer-term record has been solid: Its five-year average annual return of 5.71% ranks in the top 4% of its peers. The fund's 1.2% expense ratio is much less than the category's 1.72% average.
Indexer's Choice: Dimensional Fund Advisors
Dimensional Fund Advisors wants to remain largely unsung and turns away more business than most mutual fund firms will ever get. But if individual investors have the chance to invest in DFA's proprietary index funds, jump.
DFA manages $33 billion in assets -- about two-thirds of which is from institutions and the rest through funds sold to individuals through financial advisers. The firm's co-founders, David Booth and Rex Sinquefield, are pioneers in index fund investing and asset-allocation strategies, and its Nobel-laden list of consultants leaves one breathless. The firm doesn't want an influx of active investors trading in and out of its funds, which would raise its expenses (the funds average a 0.46% expense ratio), so it would rather deal with investors who will appreciate and stick with its strategy. (For more about the firm, read this
recent article by Beverly Goodman.)
The fund firm is slowly starting to include its offerings in 401(k) retirement plans, so individual investors should keep their eyes open.