Six standout mutual funds
If investing is an art, then picking the right fund requires a discerning eye. We found six masters led by legends old and new.
(Fortune Magazine) -- Legendary mutual fund manager Peter Lynch once called investing an art, and the way Lynch went about it, famously spotting his "ten-baggers" by keenly studying the world around him, it was. In fact, the mutual fund industry has more than its share of Old Masters: To Lynch's lofty status, add John Templeton, Jean-Marie Eveillard, and Bill Miller -- investors who have elevated stock picking to an art form. But the mutual fund world is constantly changing. And while many of those legends are alive and well, as years pass they make room for a fresh round of investing talent. You may not recognize Chuck Akre or Mark Yockey the same way you do Peter Lynch, but they are talented investors whose returns over time have come to speak for themselves. If Lynch and his ilk are the Old Masters, call these more recent stars the New Classics.
Old or new, one thing's for sure: With the stock market booming or swooning depending on the news of the day, it's more worthwhile than ever to have one of these steady hands guiding your investment decisions. So we set out to find the true artists of today's mutual fund world: standout managers who, while their specific styles may differ, have become leaders in their field.
How did we find them? We started by screening for funds that have outperformed their peers by the widest margins over the past ten years, using data from fund-tracking firm Morningstar. To make sure our choices would be easy to buy and affordable to own, we ruled out names that were closed to new investors and focused only on no-load offerings with minimum investment requirements of $25,000 or less. We also limited our picks to funds with expense ratios lower than the average for their category. Finally, we eliminated specialized funds, as well as those whose current managers were too new to be primarily responsible for the fund's performance record.
That long list of criteria helped whittle our choices down to six funds: two large-cap, one mid-cap, and one small-cap fund, as well as two international offerings. (For investors seeking a more focused emerging-markets fund, our pick from last year -- T. Rowe Price Emerging Markets Stock (Charts) -- has continued to post dazzling results. Lead manager Chris Alderson now also manages the T. Rowe Price Africa & Middle East fund (Charts), which opened in September.)
Some of the managers here are indeed Old Masters, respected veterans whose names roll off the tongue: Ken Heebner and Bill Nygren, for instance. But you may not recognize some others -- the team from Manning & Napier, for example, has gone largely, and undeservedly, under the radar. But take our word for it: Whether they're recognizable or not, having even one of these names in your collection would reflect a savvy eye -- and an investment that, while it may not hang on the wall over your sofa, is likely to appreciate handsomely in the years to come.
CGM Focus (CGMFX)
Veteran investor Ken Heebner has long held to a strategy that on its surface is simple: He looks for opportunities wherever he can find them and then pursues them aggressively, quickly diving in and out of stocks of all sorts. Heebner's results, though, have been anything but ordinary: His CGM Focus (Charts) fund has rocketed more than 60% since the beginning of the year, thumping the S&P 500 stock index by some 57 percentage points. Even more impressive, CGM Focus has chalked up astounding average returns of 25% a year over the past ten years.
Those striking gains are the result of Heebner's keen eye for global trends and his willingness to make bold bets. In years past, for example, Heebner has bought and sold technology, homebuilders, energy, and other sectors. CGM Focus holds just 23 stocks, and nearly 60% of the fund's $5.2 billion in assets is concentrated in its ten largest holdings. Turnover in the fund can easily surpass 300% a year, meaning that the portfolio may look drastically different from quarter to quarter.
Lately Heebner has been powering up on energy stocks, with holdings such as Schlumberger (Charts), China's CNOOC, and Petrobras Energia (Charts) (one of our Ten Best Stocks for 2008). In keeping with his anything-goes style, Heebner can also bet against stocks by selling them short, and while he's unwilling to talk about those positions, the fund's recent reports show a prescient wager earlier this year against mortgage lenders Countrywide Financial and Indymac Bancorp.
Such big bets have at times made for a rocky road. In 2002, CGM Focus lost 18% as Heebner prematurely anticipated an economic recovery. With swings like that, the fund may not suit investors who want to avoid volatility. "This fund's style and eye on highfliers leaves us uncomfortable," Morningstar analyst Michael Herbst wrote in a recent report. But Heebner's bets have paid off more often than not, making him a gutsy master we'd trust with our money.
Manning & Napier World Opportunities (EWAX)
A highly elaborate research operation, not superstar managers, is the secret to success at Manning & Napier -- which may be one reason this little-known fund hasn't gotten the attention its record merits: It boasts an annualized ten-year return of 14%; its five-year figure is close to 24%.
At the employee-owned company's headquarters outside Rochester, N.Y., some 35 analysts and associates are divided into five sector-focused teams and two macroeconomic ones. Rather than be bound to one specific style, the sector groups hunt for stocks that fit any of three strategies: one based on long-term growth prospects, another centered on appealing value characteristics, and a third taking advantage of cyclical opportunities for quick profits. The macroeconomic teams, meanwhile, provide data and forecasts that help direct the stock analysts or add insight to their picks. The heads of each team form a seven-man senior research group that makes the final calls to buy and sell.
The $836 million World Opportunities (Charts) fund owns some 60 stocks, ranging from global Goliaths like Nestlé and HSBC (Charts) to Swiss dental-implant maker Nobel Biocare. Recent positions include German electronics and electrical engineering giant Siemens (Charts), which stands to benefit from efforts to improve the electrical infrastructure in the U.S. and elsewhere.
"There's a decade-long secular story of growth there as the world upgrades networks," says Marc Tommasi, Manning & Napier's managing director of global strategies, adding, "The volatility in the markets recently has offered us a good buying point."
Oakmark Select (OAKLX)
Sometimes even Old Masters go through a funk. In an August letter to his shareholders, Oakmark Select (Charts) manager Bill Nygren laid it on the line. Housing-related favorites such as Washington Mutual and Pulte Homes were getting pummeled. Other holdings in the 20-stock portfolio, like McDonald's (Charts, Fortune 500) and Viacom (Charts), weren't doing much better. Calling his fund's performance since the end of the second quarter "dreadful," Nygren said the preceding weeks had been "as frustrating as any period" in his career.
The frustration has only continued. All told, the fund has lost more than 12% in 2007, badly lagging the S&P 500. As a patient and disciplined value investor, though, Nygren still sees plenty of promise in his $5.3 billion fund's lineup. "We believe that, in general, the names in the portfolio are better values today than they were six months ago," he says.
That spells opportunity to buy a top-notch fund while it's down. In fact, Nygren wrote in his letter that he had just put more of his own money into the fund. "If people think we're as stupid as our one-year record makes us look, then they shouldn't own our fund," Nygren says. But for investors who think the firm's ten-year record is more indicative, he says, "this could be a very interesting time to make new or additional investments in the fund."
We agree. Despite the recent turmoil, Oakmark Select has gained nearly 13% a year over the past ten years, trumping the S&P. With conscientious management, a reasonable 0.99% expense ratio, and the promise of patience, the fund offers plenty of reasons for investors to think brighter days lie ahead.
FBR Focus (FBRVX)
Every now and then, old and new can work well together. Just ask Chuck Akre. After being closed to new investors for more than two years, the veteran money manager's 11-year-old FBR Focus (Charts) fund, formerly FBR Small Cap, reopened in January -- and welcomed a fresh influx of more than $550 million.
With cash accounting for more than a third of the portfolio, FBR also announced over the summer that it would change the fund's name and eliminate its policy of investing at least 80% of assets in companies with market values of less than $3 billion. The moves mean that Akre now has the flexibility to buy stocks of larger companies -- or to hold large cash positions while waiting for opportunities.
Despite those shifts, Akre's $1.6 billion portfolio has remained remarkably stable -- as has the investing approach that produced annualized gains of 15% over the past ten years. "Our investment style hasn't changed an iota," he says. Indeed, investments must still meet strict valuation criteria: Akre will pay only a modest multiple of free cash flow per share, typically between ten and 20, depending on the business.
Akre says he will still keep a concentrated portfolio of around 40 stocks, and he'll continue to look for "little compounding machines" -- businesses that have a relatively high return on capital (15% or higher), with solid management teams and opportunities to reinvest excess cash to juice returns.
Bridgeway Ultra-Small Company Market (BRSIX)
Finding a superior small-cap fund is no easy feat. Sifting through the thousands of burgeoning companies around the world is exhausting work for money managers. Those that do it well are often inundated with cash, forcing them to either eye larger targets or shut their doors to new money.
The Bridgeway Ultra-Small Company Market (Charts) fund is the rare small wonder: a strong performer that's responsibly run and still open to new cash. Bridgeway founder John Montgomery is known for his quantitative strategies, but this fund takes a different approach. Instead of actively screening for the next Microsoft (Charts, Fortune 500) or Google (Charts, Fortune 500), it tracks an index of tiny stocks with market caps no bigger than the smallest 10% of companies on the New York Stock Exchange. Montgomery and his crew try to roughly mirror the index by owning some 550 of the 1,900 or so stocks it comprises.
At the same time, the fund's managers avoid businesses that could blow up and hurt overall performance. ("In the very-small-cap space, that adds more to the return than you might think," says Montgomery.) The fund is also run with a strong emphasis on tax efficiency, and it boasts an extremely low expense ratio of 0.67%.
All this means that when the market for microcaps heats up, as it did for a seven-year stretch beginning in 2001, this fund really shines. Over the past five years it has posted annualized gains of 19%. Over ten years, it has averaged returns of nearly 15%, beating the Russell 2000 and 97% of the competition in its category. To be sure, those profits may be hard to sustain in coming years if investment trends start to favor large caps, as many suspect they will. But even if that happens, this fund makes for a smart way to sprinkle microcaps into any balanced portfolio.
Artisan International (ARTIX)
Flexible. Patient. Sensitive. Those might sound like adjectives from a Match.com listing, but they're terms Morningstar analyst Dan Lefkovitz uses to describe Artisan International (Charts) fund manager Mark Yockey. Yockey, who has helmed the portfolio since 1996, has made a name for himself by finding long-term growth stories across developed and emerging markets.
He closely studies global trends like demographic changes, infrastructure development, increasing privatization, and the surge in outsourcing to unearth catalysts that could spark corporate earnings growth or high levels of free cash flow. At the same time, Yockey is sensitive to valuations, using a variety of metrics to make sure he's not overpaying.
Those themes and price concerns result in a portfolio of some 90 stocks based anywhere from Canada to Qatar. (European stocks make up roughly 60% of the fund; companies in emerging markets account for about 20%.) One recent addition: In the third quarter of this year, Yockey picked up Spanish telecom leader Telefónica, which serves some 220 million customers in Europe. It was a call that paid off quickly: The stock has soared more than 40% since the beginning of July, helping the fund post an impressive 23% gain over the past 12 months.
With stock-picking successes like that, it's no wonder the fund has gained more than 15% a year over the past decade, whipping the MSCI EAFE foreign index by six percentage points. That makes Artisan International a real world-beater -- and puts Yockey well on his way to becoming an Old Master.