Favorite Boutiques Launch New Funds
They aren't all created equal, and fees need to come down.
Investors have far more choices than they did just a few months ago. Nearly 100 mutual funds have been launched since the end of 2010.
While there has been some variety in the strategies offered, a couple of trends are clear. The most-populated category so far this year, for example, is the long-short group, thanks to a smattering of absolute-return funds (and there are more of these to come). Another trend is investing internationally, particularly in emerging markets.
Investment boutiques, which tend not to launch funds as regularly as the larger fund families, have taken part. Fairholme Allocation (FAAFX), launched on Dec. 31, 2010, has already amassed nearly $200 million as of the end of March 2011. That's not surprising, given managers Bruce Berkowitz's and Charles Fernandez's spectacular long-term record on Fairholme (FAIRX).
Another boutique, Ariel Investments, launched Ariel Discovery (ARDFX), which takes a deeper-value approach than other Ariel offerings and invests in micro-cap stocks. While the fund's inception date is Jan. 31, 2011, its manager David Maley had been managing money in this style for several years prior, even preceding his 2009 start at Ariel. Similarly, TCW International Small Cap (TGICX) was created at the end of February 2011 for manager Rohit Sah, who had just joined the firm after compiling a strong but volatile seven-year performance record at Oppenheimer International Small Company (OSMAX).
Below are four more noteworthy new additions. One common attribute is that not one is a bargain, though some have more-reasonable fees than others.
FMI International (FMIJX)
FMI International is just the third mutual fund managed by Fiduciary Management, a 30-year-old investment firm in Milwaukee. The firm's management committee, which includes all of FMI's analysts regardless of tenure, will use a value-oriented approach to pick large-cap international stocks here. They expect to have a compact portfolio, typically between 15 and 25 stocks. (It had 23 at the end of March 2011). That kind of focus makes the fund one of the few truly concentrated international funds.
While concentration can make for a riskier investment and sometimes contributes to volatility, the management team here has had much success with its similarly styled large-blend fund FMI Large Cap (FMIHX). That fund boasts one of the category's best long-term performance records and has suffered limited volatility along the way, thanks in part to the managers' willingness to keep cash in the portfolio as well as their preference for steady-Eddie firms, such as top picks 3M Company (MMM), and Wal-Mart (WMT). Generally, FMI Large Cap holds up better than peers in downturns but lags in rallies.
Investors can likely expect a similar performance pattern from International. Although a complete portfolio is not yet available, the fund's top-10 holdings include similarly stable companies, such as Nestle (NSRGY) and Diageo (DEO). According to the fund's prospectus, emerging-markets stocks won't be a big piece of the portfolio, which should mute volatility here.
Marsico Emerging Markets (MERGX)
Marsico Capital Management may be jumping on the emerging-markets bandwagon, but there are a couple of reasons this offering should pique interest for long-term investors. First, it comes from a well-respected growth shop that's been successful over the long run investing both domestically and internationally. In fact, Harbor International Growth (HIIGX), which is run as a clone of Marsico International Opportunities (MIOFX), is an Analyst Pick, and those funds have a history of investing more heavily than their foreign large-growth peers in emerging markets. Second, this is one of a relatively few number of mutual fund firms that use top-down, or macroeconomic, analysis in building their portfolios. Because country and currency factors can be big drivers of emerging-markets equities' performance, this practice could be an advantage for the fund.
That said, there are reasons to be skeptical, at least this early on. To run this fund, Marsico has recently promoted three analysts to the portfolio-manager ranks; none of them has a public track record running mutual funds (though one was added as a comanager on International Opportunities in November 2010). Furthermore, neither Jim Gendelman (of International Opportunities) nor firm founder and portfolio manager Tom Marsico is part of the management team (though the shop is quite collaborative, so they may well be contributing).
Like Marsico's other offerings, this one will concentrate its picks in a limited number of stocks; as of the end of February 2011, it had just 38 holdings. Although Marsico funds do work to diversify by industry group, the relatively small size of the portfolio will likely contribute to a greater deal of volatility, in an already volatile category. Finally, with an expense ratio capped at 1.75%, it's simply too expensive at this point.
Royce Special Equity Multi-Cap (RSEMX)
At the end of 2010, The Royce Funds actually launched four funds, but this one is the small-cap specialist's first foray into large-cap companies (in addition to small caps and mid-caps). Royce Special Equity Multi-Cap is run by veteran manager Charlie Dreifus, who Morningstar nominated for its Manager of the Decade award in 2010 and who also runs Analyst Pick Royce Special Equity (RYSEX). Here, he will apply his disciplined classic-value strategy to stocks across the market-cap spectrum with an emphasis on stocks greater than $5 billion in market cap. Like Special Equity, this fund's portfolio will be limited to a smaller number of holdings. It had 37 stocks as of the end of December 2010.
Separating Dreifus from the pack is his insistence on clean accounting. Not surprisingly, a look at December 2010's top-10 holdings shows a preference for profitable, high-quality firms, including top pick Johnson & Johnson (JNJ), with zero to limited debt. Dreifus' prudent approach to stock-picking, as well as a willingness to let cash build when valuations seem stretched, has helped Special Equity consistently record Morningstar Risk ratings of "low." Meanwhile, that fund has turned in one of the small-blend category's best return figures--roughly 12% annualized over the past 10 years.
Weitz Research (WRESX)
The latest fund offering from Weitz is now the cheapest equity fund offered by the firm, thanks to a fee waiver that caps expenses at 0.90% of assets. Weitz Research, as its name suggests, will be run by four analysts, with oversight by director of research and portfolio manager Bradley Hinton. Each analyst will choose between eight and 16 stocks, and Weitz says the fund will typically own between 25 and 35 stocks; this level of concentration fits Weitz's MO. The analysts can buy small-, mid-, or large-cap stocks.
The fund comes with some history. It was started as a private partnership in April 2005, and the fund's prospectus and firm's website provide performance figures that have been calculated after subtracting pro forma fees and expenses. According the website, Weitz Research has returned an annualized 6.1% through the end of March 2011, compared with 5.1% for the S&P 500 Index and 4.8% for the Russell 3000 Index.
Investors can expect a lot of overlap between this and Weitz's other funds. Given the overlap and concentration, they can also expect a similar pattern of returns, which includes lumpy results and a considerable amount of volatility. That said, long-term investors have been rewarded with pleasing results.
Bridget B. Hughes has a position in the following securities mentioned above: JNJ. Find out about Morningstar’s editorial policies.