PICCOLOS VS. TUBASTiny, nimbler players can outdo the biggies
It wasn't so long ago that $100 million was considered a pretty-good-size mutual fund. But as hundreds of billions of dollars poured into funds during this decade, the definitions of large and small have changed. A $100 million fund today is barely a blip on the radar screen.
The world doesn't need more funds--only better ones. And surprisingly, many of these smaller funds have excellent returns. The reason many are so small is that they have no marketing or advertising budgets--so they carry on in relative obscurity. Some others belong to well-known fund families but have been overshadowed by their larger brethren. And some are small only because they are still new and their track records are short.
Smaller funds, especially if they're being run by experienced money managers, can be shrewd investments. They're far more nimble than the megafunds: They can buy stocks without necessarily bumping up the price and can sell quickly if necessary. Smaller funds' drawback is that they sometimes have higher expense ratios because they have fewer assets over which to spread the costs.
To find these up-and-comers, we screened Morningstar Inc. data for the top funds that had at least one year's track record, as well as small funds with good risk-adjusted returns over the past three to five years. Defining a small fund as anything under $130 million--the cutoff point for funds in the Mutual Fund Scoreboard--we came up with these 50 contenders (table). In most cases, the results are no fluke. Many are run by veteran institutional investors with proven track records who manage money for pension funds and foundations.
SMALL SPREAD. Among the standouts is the White Oak Growth Stock Fund, with $54 million in assets. The fund has returned an average 29% per year over the past three years, the best of our up-and-comers for that period. The fund practices a high-octane strategy that nonetheless has been only slightly more volatile than the overall stock market. Because of its size, the fund doesn't have to spread its money over hundreds of stocks. Instead, portfolio manager James D. Oelschlager is able to concentrate on his best stock picks. The fund is nearly fully invested, and he holds just 22 stocks. Some 65% of the fund's total assets are in high-tech winners such as Intel, Cisco Systems, and 3Com.
The fund may be small, but Oak Associates Ltd. is not. The Akron investment firm also manages $5 billion in assets for California and Oregon state pension systems and for numerous corporations. As for the mutual fund, says Oelschlager, it's relatively unknown because it has not been marketed to anyone other than his acquaintances who asked him to invest their money. ''It was much easier to set up a fund for family and friends than manage a bunch of individual accounts,'' Oelschlager says.
White Oak is not the only ''friends and family'' fund on the list of up-and-comers. There's the $126 million Torray Fund, which buys what many others shun: companies that are in Wall Street's doghouse. Manager Robert Torray is a patient investor, who finds quality companies and sticks with them until they come in favor--and he'll wait four or five years. He bought Citicorp at 8 (it's now at 112) and IBM at less than 50 (now at 168). The fund has a 20.7% average annual return over the past five years, about five percentage points better than the Standard & Poor's 500-stock index. In total, Torray manages $2.3 billion in pension assets.
Some institutional money managers, such as Susan M. Byrne of Westwood Equity Fund Retail Class, decided not to wait for the fund mavens to discover her fund. She started marketing the fund two years ago and managed to get its assets up from $16 million to $38 million. Of course, good returns are the best marketing plan, and that she has. This fund, a blend of large-cap stocks, competes in a pretty crowded fund category, yet it beat the S&P 500 over the last one-, three-, and five-year periods.
The $9 million Smith Breeden Equity Plus Fund is another market-beating bantamweight fund. Portfolio manager John Sprow calls it an ''enhanced index fund,'' which means he's trying to beat the S&P 500 index by about one percentage point a year. That doesn't sound like much, but it's a hurdle that many funds can't clear.
Sprow takes an unorthodox approach. Rather than invest in the stocks that are in the S&P, he buys stock-index futures with a small part of the fund and invests the rest in mortgage-backed securities, which provide a much higher yield than stocks. Over the past three years, the fund returned about 0.40% a year more than the S&P 500 index. The fund has been in business since 1992.
Not all managers of small funds are unknowns. The $17 million Spectra Fund is managed by David Alger, who also runs six other funds--with assets totaling $7.3 billion--sold mainly by stockbrokers and insurance companies. Spectra was closed to new investors until January, 1996, and is the only no-load fund managed by his firm, Fred Alger Management Inc.
True to Alger's aggressive investment style, Spectra focuses on high-growth stocks: 32% of the fund is in technology. The fund can also sell stocks short, although Alger says he has not yet done so. Although Spectra failed to beat the market last year, it has an excellent long-term record. ''We've been reluctant to send out flares [about no-load Spectra] because it might antagonize our brokers,'' says Alger.
Well, Mr. Alger, the word is out--about Spectra and about other gems among the small funds. With investors' insatiable appetite for mutual funds, these funds won't be under wraps for very long.
By Geoffrey Smith in Boston
Updated June 15, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.