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Fund Spy

Two Tiny Funds That Deserve More Attention

There's no reason that these offerings should go unnoticed.

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Many of you are not particularly happy with your funds these days. Are you looking for others? Plenty of prominent funds could serve your purpose. But you probably already know about those. And in some cases a prominent fund may be the disappointing performer you're trying to replace.

So here we present two funds you almost certainly don't own. How do we know? Because the two have a combined total of just $66 million in their coffers--a pittance in the mutual fund world. One is young, the other is 16 years old, but both have very experienced management.

There's no reason for either to be so overlooked, yet that adds to their attraction right now. Small funds have more flexibility than their bigger counterparts. They can typically buy or sell as many shares as they want of a company, even a fairly small one, without moving that stock's price much, or at all. It's also easier for them to completely unload a firm's shares when they deem it necessary.

Of course, smaller funds don't have broad shareholder bases over which to spread out their business costs, so they tend to be more expensive. But there's a chance the cost for shareholders will drop with just a fairly modest growth in assets. The increase in assets isn't guaranteed, nor is it assured that the expense ratio will drop as much as it should. But that process does frequently play out.

The funds below aren't perfect. Investigate and evaluate them carefully before deciding if they're right for you. But they have enough appeal to merit getting into the conversation; if you don't even know about them, they can't even get that far.

 UMB Scout International Discovery (UMBDX)
Manager James Moffett has been running  UMB Scout International (UMBWX) with tremendous success since 1993. (He's been joined by comanagers in recent years). Although Moffett has always had a fondness for medium-size companies, that fund's overall portfolio usually lands firmly in large-cap territory. Its current average market capitalization is about $20 billion, right around the norm for the foreign large-cap categories. That's appropriate, because the fund is intended to serve as a shareholder's core international fund. But there are some opportunities among small and midsize companies that the fund's managers don't pursue, or at least not to the extent they might otherwise wish to do.

Enter UMB Scout International Discovery, created at the end of 2007. This fund focuses more on midsize companies than its older sibling does, with small caps also included in its purview (along with some larger firms). Its average market cap is below $5 billion--less than one fourth the size of its older sibling's portfolio. But it does share its sibling's very patient approach. Moffett and comanager Michael Stack tend to hold on to what they buy; this fund's turnover rate was a meager 7% in the second half of 2008.

This fund doesn't have to worry about getting too bulky. In fact, it had a mere $10.5 million in assets as of the middle of last week. That's not enough to pay the bills. Its expense ratio would have been 3.40% for the second half of 2008 had the advisor not waived much of that, resulting in an expense ratio for shareholders of 1.60%. Even after the waiver, that cost isn't cheap by any means, but the other funds at this shop are quite reasonably priced, so there's a good chance that with just a decent amount of assets this fund's cost would fall to a much more palatable level. Meanwhile, that minimal turnover rate does keep down trading costs.

The fund isn't a slam-dunk--the managers don't have a track record with a fund of precisely this type, and its current cost isn't pleasant. But with the menu of truly attractive international small/mid-cap funds rather sparse, this nimble one is worth putting on the watch list for anyone interested in the foreign small-cap field.

 Oak Value (OAKVX)
This fund isn't quite as tiny as the UMB offering, but with just $56 million in assets as of last week, it's also a minnow in the mutual fund world. However, it's not a newbie like UMB Scout International Discovery, and it once was bigger, though never a giant by any means. Oak Value has been around since 1993. One manager, David Carr, has been running it since that time, and another, Larry Coats, started at the advisory firm--located in North Carolina--just a year later. It has a very good record over the long term, but there have been some bumps, such as in the mid-2000s.

Despite the uneven record in recent years, the fund is worth considering because the managers use an unusual style. While they are firmly focused on value, the portfolio is often in blend or even growth territory because of their eclectic choices. They keep a tight rein on the number of stocks in the portfolio, typically owning fewer than 25 companies. They know their companies very well. For evidence, take a look at their shareholder reports, which provide more detailed discussions of their companies, and of their decision-making process, than just about any other fund out there.

The portfolio's concentration adds to the impact of each holding on returns. That can work both ways. But it paid off in 2008's awful market, when the fund landed in the top quartile of the large-value group. Avoiding the worst of the financial meltdown that stung so many other value players was one reason.

The advisor doesn't offer any other mutual funds; this approach is all it does. You get focus here in more ways than one.

Oak Value's cost isn't one of its attractions; its annualized expense ratio for the second half of 2008 was 1.49%, up from 1.37% the prior fiscal year, reflecting a decline in assets. But that figure would likely fall quickly if the fund could only boost its asset base a bit. When the fund was bigger--it had more than $500 million in the late 1990s, larger than now but hardly immense--its cost was substantially lower. With many better-known rivals having stumbled in this bear market, this offering is worth putting on the menu.

 

Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.