Four Undiscovered Value Funds
These winning funds have escaped investors' notice--and asset bloat.
There’s no doubt about it: Value is in. Over the last few years, value offerings have enjoyed a long run of outperformance versus growth, and that has spurred huge inflows into some of the best value managers such as Dodge & Cox, Royce, and American. So, if you're searching for a value fund that’s escaped amassing a bloated asset base, you’ve got to look hard.
While there aren’t a lot of attractive funds that qualify for this category, I was able to come up with a few names. I screened for funds with small assets, modest expenses, and decent performance. Before I disclose which funds made the grade, I should explain that I’m not recommending you make a big bet on value. The markets look rather risky to me, so it seems the prudent thing to do is stay diversified across the Morningstar style box and keep a decent amount of money invested overseas and in bonds.
American Century Capital Value Inv (ACTIX)
It’s easy to see why American Century’s value funds escape notice. They’re not exciting. With funds such as Clipper (CFIMX), you get big stakes in stocks that take five years to pay off or bold shifts into bonds when everyone else is in love with stocks. But this fund doesn’t make huge bets or do much of anything to call attention to itself. As result, the managers who run this fund have less than $1 billion under management.
Sound Shore (SSHFX)
Sound Shore has just about everything you’d look for in a good fund. It has experienced management, low expenses, and a great record. Management's strategy requires intensive contacts with a company, its customers, and its competitors so that it can get a firm fix on how the company is faring in the marketplace. The fund's managers are picky investors whose portfolio is concentrated in just 40 stocks. It’s worth noting that the fund has had a tailwind of late because, despite being grouped in the large-value category, it includes a lot of mid-cap stocks.
In addition, management does a good job of aligning its interests with shareholders'. Managers invest in their own funds and they keep a lid on soft-dollar deals. Despite that, this large-value fund has only $1.1 billion in assets.
C&B Mid Cap Value (CBMDX)
This concentrated mid-cap fund is starting to get noticed: Its five-year annualized return of 18.70% will do that. As a result, the fund has expanded from $10 million to $500 million in just three years. Even so, it should still have some room to grow. Management blends valuation methods with a growth investor’s preference for companies with competitive advantages. This approach has led them to some big tech winners such as Parametric Tech (PMTC) that other value managers might have passed on. It’s a pretty bold fund, but it has made its risks pay off. This fund is going to become part of Wells Fargo (WFC), but management won’t change and it will keep its no-load shares open.
Vanguard U.S. Value (VUVLX)
This fund is run by Grantham, Mayo, Van Oterloo & Co. (GMO), a firm that focuses on institutional clients--and it shows. Managers employ a disciplined strategy based on a variety of complex quantitative models. Those screens have managed to ferret out winners rather consistently. Though the fund dates back to only 2000, GMO has produced strong results in accounts with longer records. Management runs quite a bit more than $600 million in this fund, so I don’t want to oversell the exclusivity. However, it takes quite a lot to reach unmanageable asset base issues in a large-value strategy like this one, where picks are distributed across stocks of all shapes and sizes (management’s models sift through the all-cap Russell 3000 Index). Throw in skilled management and low costs, and you’ve got an option well worth considering.
Note to Congress
Last week I posed the question: Should Congress change tax laws so fund investors don’t pay capital gains taxes until they sell their shares? A whopping 94% of you said "Yes"!
Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.