BOSTON ( TheStreet) -- Ten mutual funds with reputations for making concentrated bets on outlier stocks are buying financial companies, as beaten down a sector as you can find.The results of such bets can, of course, be disappointing, as they have for the most part this year, or they could represent wily fund managers laying the groundwork for big gains when the market rebounds. Morningstar analysts selected 10 of their favorite "against the grain" funds known for their intrepid picks and combined their top holdings into one theoretical portfolio to see what their managers are up to now, with some surprising results. For example, only three of the portfolio's top 25 holdings are among the S&P 500 Index's 25 largest stocks, despite the fact that all of the funds are large-caps. Those three are about as conservative as you can get: Warren Buffett's conglomerate Berkshire Hathaway ( BRK.B), software giant Microsoft ( MSFT), and consumer-goods company Procter & Gamble ( PG). But notable in their absence are the huge growth-stock favorites that are among the most ubiquitous in most mutual funds: iPad and iPhone maker Apple ( AAPL), Internet search engine Google ( GOOG), and oil firms Exxon Mobil ( XOM) and Chevron ( CVX). Morningstar chose the 10 funds based on their ability to add value over the long haul, "but the funds' managers typically haven't done that by simply making outsized bets on the largest constituents of their benchmarks. They've often gone against the grain, buying unpopular stocks and those that take up only a small slice of their funds' benchmark." The funds are Longleaf Partners ( LLPFX), Oakmark Select ( OAKLX), Brown Capital Management Small Cap ( BCSIX), Clipper ( CFIMX), Fairholme ( FAIRX), FMI Large Cap ( FMIHX), Jensen Quality Growth ( JENSX), Mairs & Power Growth ( MPGFX), Matrix Advisors Value ( MAVFX), Sequoia ( SEQUX) and Brown Capital Management Small Cap ( BCSIX). The funds' individual results are varied, although they all have excellent long-term records. For example, Clipper is up 1.6% this year, but has a three-year average annual return of 15%. Longleaf Partners is down 4.7% this year, but up an average of 20% per year over the past three years. Fairholme, managed by Bruce Berkowitz, is down 27% this year, but has a 10-year average annual return of 7.8%. The S&P 500 is little changed this year, and has risen 3.8% over the past 12 months and an annual average 13% over the three years. The funds' combined top picks are detailed on the following page:
1. Berkshire Hathaway ( BRK.B), the conglomerate run by famed value investor Warren Buffett, has a portfolio of businesses ranging from railroads to retailing, each with a unique competitive advantage. But its biggest bet is on the insurance industry. Berkshire has been one of the largest holdings of three of the funds, but each has trimmed its stake of late, led by Sequoia, which gradually decreased its holding to roughly 9% from 23% of assets in March 2009. Sequoia's managers said in a recent note to investors that while they think the stock is still selling at a discount to its estimated fair value, it's not as cheap as it once was. Berkshire's shares are down 5% this year and have a pedestrian 2.4% average annual return over the past three years. It has a market value of $181 billion. 2. Microsoft ( MSFT) developed and sells the Windows PC operating system and the Office suite of productivity software, among other products. The company faces a challenge in the impending move to cloud computing by most users, because Web-based applications will be managed there, a threat to the Windows PC operating system. Microsoft shares are down 4% this year, but over three years have an average annual return of 9.5%. It has a market value of $227 billion and carries a projected dividend yield of 3.04%. 3. Procter & Gamble ( PG) is the world's largest consumer-goods manufacturer, with a lineup of famous brands, from Tide detergent to Iams pet food. Its shares are up 1.5% this year but have a 10-year average annual return of 7%. They carry a 3.32% projected dividend yield. The company has a market value of $176 billion. 4. American International Group ( AIG), which had to be bailed out by the federal government to avoid bankruptcy three years ago, is still one of the largest insurance and financial-services firms in the world, with a focus on property-casualty and life insurance. Its shares are down 52% this year, and they have an average annual loss of 47% over the past five years. It has a market value of $45 billion. Fairholme fund recently held 21% of AIG's shares, making it by far its largest investor, but that stake has crippled the fund's returns this year. AIG has a $45 billion market value. 5. American Express ( AXP) is a giant in the credit card business. Because of its closed-loop network, Amex essentially owns the entire value chain and, as a result, retains the full economic value that's being created by its service. Amex is a money machine. It earned $1.2 billion, or $1.03 per share, in the third quarter, up 14% from a year earlier. Its shares are up 16% this year and have an average annual return of 29% over three years. American Express has a market value of $58 billion. 6. Bank of New York Mellon's ( BK) primary focus is providing services such as asset administration and trust services to money management firms. Its steady, fee-driven revenue helps mitigate volatility in the stock and bond markets. Clipper, FMI Large Cap and Longleaf Partners each have 3% to 5% of their assets invested in the firm. Its shares are down 30% this year and have a three-year average annual decline of 9.9%. A Morningstar analyst writes that the stock has "been hit because of expenses from integrating acquisitions and controversy over currency trades it made for custody clients to settle foreign securities transactions." The company has $26 billion market value and a projected dividend yield of 2.51%. 7. 3M ( MMM), a diversified manufacturing conglomerate, with products ranging from Post-It notes to health-care technology, is favored by FMI Large Cap, Jensen, and Mairs & Power Growth, each of which have from 4.3% to 4.6% of their portfolio assets in the company. Note that Jensen can invest only in companies that have generated returns on equity of at least 15% for a minimum of 10 consecutive years. Morningstar says that 3M's "wide range of products, history of innovation, and geographic diversification have translated into dependable profits." The $58 billion market value company has a projected dividend yield of 2.74%. Its shares are down 5% this year, but have a three-year average annual return of 10%. >>To see these stocks in action, visit the 7 Top Stocks Favored by Maverick Mutual Funds portfolio on Stockpickr.
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