Contrary to public opinion, the entire mutual fund industry is not rotten. In the good old days -- say four months ago -- my primary function as a mutual funds columnist was to hunt for solid fund offerings for TheStreet.com readers. Ever since New York Attorney General Eliot Spitzer dropped the bomb on Sept. 3 that some mutual funds have allowed hedge funds and others to make abusive trades of their offerings, this gig has more closely resembled a crime reporter's beat. (Happily so far, none of the funds I have highlighted over the past year or so have turned up on the scandal sheet.) For today's column, I'm going to put aside talk of scandal and flag some lesser-known mutual funds that are worthy of your consideration. In each case, I've chatted up the fund's skipper (or co-skipper, as the case may be) to hear their outlook for 2004 and the stocks they favor. Oh, and I must add that it is unlikely these funds will flame out in scandal, for a variety of reasons. First, they're too small to lure market-timers -- hot money would swell their asset bases and the rapid-fire trading would stick out like a sore thumb. Second, the funds espouse a value-oriented, long-term philosophy that wouldn't provide the daily volatility needed to give the one-day pop that timers crave. Third, while I haven't had the managers over for dinner or anything, the firms and their skippers strike me as a scrupulous bunch that wouldn't cotton to outsiders gaming their funds. Besides, they all have most of their personal wealth tied up in the funds -- so why would they allow a timer to pick their pockets? But enough about scandals. Let's get to the funds.
Mosaic Funds' Rich EisingerAlong with Jay Sekelsky, Rich Eisinger co-manages two great offerings from the Mosaic family of funds: The large-cap blend ( MINVX) Mosaic Investors fund and the ( GTSGX) Mosaic Mid-Cap fund. These value-oriented funds tend to trail the sprinters during the bull runs but crush the competition during the rough patches. That's led to impressive performance over the long haul. The Mid-Cap fund's five-year average annual return of 11.89% is good for the top 22% of its peers, while the Investors fund's 3.89% five-year average annual return ranks in the top 12% of all large-cap blend funds, according to Morningstar. 1. What is your outlook for 2004? We really are a bottom-up, stock-picking firm. Having said that, it's hard not to be cautiously optimistic about the economy -- with all the positive reports. However, a lot of the economic strength is priced into the stock market, which makes it tough to find good ideas.
2. What stocks and sectors look best to you right now? We are still heavily weighted in consumer discretionary and financials. We still like insurance companies, media companies and, in some individual instances, retailers. In the Mid-Cap fund, one of our recent purchases is Willis Group Holdings ( WSH), the third-largest insurance broker in the country behind Marsh & McLennan ( MMC) and Aon ( AOC). In our opinion, the insurance-broker business is an inherently attractive one. You get highly predictable future cash flows. It's a consolidating industry so you have the opportunity to increase market share. Plus, it's a product that is increasingly necessary for customers. We've spent a long time assessing the management team. The chief executive, Joe Plumeri, comes from Citigroup ( C). Willis has a very aggressive sales culture, which is vital in that business. They are very focused on increasing shareholder value; I believe 60% of the employees own company stock. Earnings per share should be up 35% this year. While that level isn't sustainable, we think they can grow at 15% a year over the long haul. The stock is currently trading at a multiple of 13 times free cash flow, and the stock is trading at 12.8 times our earnings estimate for next year. They have managed to post return on equity in the low 30s; it's a very strong company. Another company we like is Hewitt Associates ( HEW), a human-resources outsourcer and consulting firm. We purchased it at around $24 in September and it's now up around $30. It's a tremendous brand name that has been built up over 60 years; they have had 42 consecutive years of revenue growth. Most of those years were double-digit growth -- 2003 was one of the four that was single-digit. The stock fell a bit and so it presented us with a buying opportunity. We are extremely impressed with the company. We wanted to own it for a long time. It came out of an IPO about a year and a half ago -- it listed at around $22-$23 and then surged to $34. We thought we missed our chance, but they brought down guidance a bit and presented another opportunity. It's a tremendous business franchise. They are the best integrated human-resources company, providing the whole spectrum of services -- they even compete with Automatic Data Processing ( ADP) on check processing. Their outsourcing business is impressive and remarkably "sticky" -- they have a 95% retention rate in their three- to five-year contracting business. Their health care consulting business is growing -- companies are increasingly blaming bad quarters on skyrocketing health care costs, so they go to Hewitt to cut costs. Companies are also worried about underfunded pension plans, so they go to Hewitt for help in saving costs. There are big tailwinds in its favor. They are supposed to earn about $1.37 next year. I don't see any reason why you can't put a
price-to-earnings multiple of 26 on forward earnings -- ADP and Paychex sell at very high multiples. I'd say a $36 stock is the high-end price target, mid-to-high $30s -- and we are very confident in their ability to perform.