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These Top-Rated Funds Are Hidden Gems

Experienced managers, proven processes, and nimble asset bases: What's not to like?

 PIMCO Total Return (PTTRX) takes home a Gold Morningstar Analyst Rating under our new rating system; so does the boring but effective  Vanguard Total Stock Market Index (VTSMX). But you probably don't need us to tell you that such giant, widely owned funds can be worthwhile portfolio building blocks. It's a good bet that one or both of them is already in your portfolio.

Yet not all of our top-rated funds are swinging around huge asset bases. Some of our analysts' top choices haven't yet attracted much attention from investors, which could turn out to be a long-term competitive advantage for these funds. After all, smaller funds can more readily build and subtract from positions without affecting the share prices of the securities they're aiming to buy and sell. That's a luxury that very large funds don't have and is a particular benefit for managers who traffic in small, mid-, or even smaller large caps.

To help shine the light on our high-conviction funds that haven't yet attracted much in assets, I turned to our  Premium Fund Screener. I started by screening for all funds that are currently rated Gold or Silver within our new Analyst Rating system; I screened for "distinct portfolios only" to eliminate multiple share classes. I then (rather arbitrarily, I'll confess) set an asset-base limit of $500 million or less. That initial screen produced a lot of target-date funds that haven't yet garnered much in assets. But because a nimble size isn't likely to be a long-term competitive advantage for funds like these, which can graze across multiple asset classes, I decided to eliminate Balanced funds from my screen.

Note that some of the funds that made it through my screen are technically small, but their managers are investing much larger pools of assets in the same way, so it's a stretch to call them nimble. For example,  Harbor Real Return  and  Harbor Commodity Real Return  are no-load versions of much larger PIMCO vehicles. That said, the screener did unearth some worthy funds that investors have overlooked to date. Premium users can click  here to view the screen and its complete output; I've highlighted three of them below.  

 Bogle Small Cap Growth 
This fund is a good example of how the Morningstar Ratings for funds and Analyst Ratings can butt heads. Based on its risk-adjusted performance alone--which is what the star rating captures--it looks pretty 'meh' with just 2 stars. Would-be investors should take a close look at its past performance pattern to see what they're getting into, as the fund's history has featured some shocking losses as well as strong gains in more hospitable environments. Yet the fund also earns a Gold Analyst Rating, reflecting Morningstar analyst Greg Carlson's confidence in the fund's management, its process, and its shareholder friendliness. He also likes that management has incorporated lessons learned during the bear market into their quantitative screens. For example, they're looking to short-term signals to help them capitalize on trading opportunities during periods of volatility.

 Tweedy, Browne Value (TWEBX)
This fund's management team earned Morningstar's 2011 International Stock-Fund Manager of the Year award for their work on  Tweedy, Browne Global Value (TBGVX), but Morningstar analyst Kevin McDevitt finds world-stock fund Tweedy, Browne Value to be a compelling option, as well. (World-stock funds invest in the U.S. companies as well as those overseas.) The team employs a value-oriented approach but eschews truly troubled firms; instead, they seek firms with strong brand names that can exert pricing power. Owing to that conservative strategy, their charges generally lose ground in the most frothy of market environments but come through challenging markets in fine shape. Such was the case in 2008, when the fund lost less than the vast majority of its peers, and again in 2011, when its ample exposure to defensive consumer staples stocks held it aloft amid concerns about slowing global growth.

 Weitz Hickory (WEHIX)
In contrast with the Tweedy team, which would prefer to buy good businesses at reasonable prices, manager Wally Weitz doesn't shy away from truly distressed firms, provided he can get them cheaply enough. Weitz's willingness to delve into unloved names backfired during the credit crisis: With more than one third of its portfolio in financials stocks in late 2007, including basket cases such as Countrywide, Fannie Mae (FNMA), and  American International Group (AIG), the fund's losses were predictably awful, and McDevitt acknowledges that the misguided financials bet remains a black spot on its record. That said, the fund recovered nicely following the crisis, and the combination of a seasoned manager employing a proven contrarian strategy with a nimble asset base is compelling.

Christine Benz has a position in the following securities mentioned above: TBGVX. Find out about Morningstar’s editorial policies.