There are good reasons why some of the biggest mutual fund companies attract tens of billions of dollars from investors, and usually these reasons include a record of superior performance. But as a fund company grows bigger, that performance often suffers as the firm launches more and more funds with a variety of investment goals and restrictions… builds up enormous portfolios that may make it difficult to buy only the best securities and to sell quickly when they run into trouble… and hires fund managers with varying degrees of skill.
An attractive alternative: “Boutique fund” firms. These are small firms — often owned by a family or a small group of employees — that have very few funds (some have only one or two), with little assets under management (some of the funds have a few hundred million dollars, and none have more than a few billion dollars). The best of these offer strong long-term returns, often beating their giant competitors. That’s because their managers and other employees are able to focus more intensely on the success of just a few funds… to move more quickly to buy and sell when appropriate… to choose their favorite investments and strategies in all areas of the market… and possibly to load up on cash and bonds when stock opportunities fade.
HOW TO INVEST IN BOUTIQUE FUNDS
Use them as supporting players. Most of these funds are focused on a limited number of stocks and so should not become core holdings in your portfolio. They’re ideal for spicing up returns, but it may not be wise to depend on them for a big portion of your assets.Best:Keep any single boutique fund under 10% of your total portfolio for conservative investors… under 20% for aggressive ones.
Check that the fund has at least $50 million in assets and a strong 10-year track record. You want a fund that has attracted enough assets to survive difficult periods… that is able to spread its expenses over a good number of investors so that investor returns are not eaten up by annual fees… and that has proved that it can survive and perform well in good times and bad.The following boutique funds have strong long-term performance records…
Large-cap funds
Mairs and Power Growth Fund (MPGFX) is one of only two funds at a firm founded in 1931 in St. Paul, the other being a “balanced” stock-and-bond fund. Many of the holdings in the $1.9 billion large-cap blend (growth and value) fund have been there for decades, and one stock, Target Corporation, has been held since the 1960s, when the retailer went public. The fund manager, Bill Frels, looks for large companies whose sales and profits are growing faster than the economy, but he won’t buy them until they’re undervalued. The fund, with an annual expense ratio of just 0.7%, has found success for decades buying stocks of companies within driving distance of its own offices for a large portion of its portfolio. Management says that it is easier to understand such companies inside and out. The fund’s performance put it in the top 2% of the funds in its category over the past decade. It lost 29% in 2008, when the Standard & Poor’s 500 stock index lost 37%.Drawbacks: Frels’s risk-averse approach and low turnover of stocks tend to limit the fund’s performance in roaring bull markets. For example, in 2009, the fund is up 13% as of October 31, compared with 17% for the S&P 500. Frels’s preference for owning midwestern companies can limit the fund’s pool of stock opportunities, as can his tendency to exclude most technology and energy companies.
Performance: 5.9%.*
Top holdings: 3M Company… Target Corporation… Emerson Electric. 800-304-7404, www.mairsandpower.com.
Yacktman Focused Fund (YAFFX) is one of two funds at Yacktman Asset Management in Austin, Texas, the other being the more diversified Yacktman Fund. Over the past five and 10 years, the $511 million Focused Fund ranked in the top 1% of large-cap value funds. Last year, it lost only 23.5%, and this year, it was up 52% through October 31. Donald Yacktman and his son, Stephen, run a portfolio of fewer than 35 stocks and hunt for profitable, debt-free companies that generate a lot of cash, yet are disliked by many investors and analysts. For instance, in the middle of the financial crisis last year, Yacktman invested in AmeriCredit, which provides automobile financing for used-car buyers with poor credit. AmeriCredit has soared nearly 140% this year, as of October 31.Drawback: Yacktman’s willingness to build up large cash positions when he finds few stocks that are attractive. This approach means that he can lag in bull markets (although the approach allows him to pick up many bargains when he believes that the market will do well).
Performance: 11.7%.
Top holdings: News Corporation… PepsiCo… Coca-Cola. 800-525-8258, www.yacktman.com.
Small- and mid-cap funds
The Delafield Fund (DEFIX). Fund manager Dennis Delafield loves to find beaten-down small- and mid-cap stocks that are in the early stages of a turnaround and that have some favorable catalyst, such as a change in management or a major new product launch, that will help them to do well. The fund, which Delafield has run since its inception in 1993, has maintained remarkably consistent returns, ranking in the top 11% of the fund’s category for every period from the past year to the past 15 years.Drawbacks: The fund recently joined a slightly larger asset-management firm, Tocqueville Asset Management, but that firm has only about $6 billion in assets (including the Delafield Fund assets). Dennis Delafield has promised shareholders that he will continue to be able to operate independently.
Performance: 11.4%.
Top holdings: Flextronics International… Thermo Fisher Scientific… Checkpoint Systems. 800-697-3863, www.tocquevillefunds.com.
FMI Common Stock Fund (FMIMX). Ted Kellner has run this fund from his offices in Milwaukee for 28 years. He looks for small companies with strong, steady business models, such as Patterson Companies, the leading distributor of dental and veterinary health-care products in North America. Before Kellner buys, he waits until the stocks are out of favor because of temporary setbacks, such as weak sales or falling short of Wall Street’s earnings expectations. The fund has $853 million in assets and ranks in the top 3% among funds in its category over the past five and 10 years.Drawbacks: Kellner’s concentrated portfolio — he keeps one-third of his assets in his top 10 picks — can lead to high volatility. Still, careful stock-picking limited the fund’s loss to 20% in 2008.
Performance: 10.6%.
Top holdings: Arrow Electronics… St. Mary Land & Exploration… Patterson Companies. 800-811-5311, www.fmifunds.com.
Westport Fund (WPFRX). This tiny ($225 million) mid-cap blend (growth and value) fund based in Westport, Connecticut, has delivered big results. Fund manager Ed Nicklin has run this flagship offering, as well as a small-cap fund, since 1998. He looks for out-of-favor stocks of all types, blending, for instance, faster-growing technology stocks with utilities and food manufacturers. The fund ranks in the top 2% of funds in its category over the past five years.Drawbacks: The fund’s expense ratio of 1.4% is higher than average.
Performance: 8.1%.
Top stock holdings: Precision Castparts… Anadarko Petroleum… EOG Resources. 888-593-7878, www.westportfunds.com.
