Investing May 8, 2008, 5:00PM EST

Veteran Managers, Nimble New Funds

by Lewis Braham

O'Brien, Gillespie, and Howard, the brain trust at Prospector Richard Freeda/Aurora

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Byrne's small-cap strategies weren't available to retail investors until recently Evan Kafka

It takes an experienced hand to navigate today's turbulent markets. But if you're looking for a mutual fund that will see you through the morass, don't just look at funds with long track records. Often these are victims of their own success, having become so popular that their asset levels are bloated. As a result, managers may not be able to maneuver portfolios nimbly enough to sidestep downturns and may also miss out on potential buying opportunities.

A better strategy may be to buy a new fund launched by an old hand. Many veterans who have long overseen private and institutional money successfully are diversifying and building their brands by launching retail funds.

Consider, for instance, Prospector Funds in Guilford, Conn., which manages $3.5 billion, primarily for two institutional clients. Launched in September, 2007, its two retail funds, Prospector Capital Appreciation (PCAFX) and Prospector Opportunity (POPFX), have only a combined $17million. The managers, however, have a huge amount of experience. John D. Gillespie founded Prospector Partners in 1997 and manages the stock portfolios of OneBeacon Insurance (OB) and White Mountains Insurance, which has a long-term association with Warren Buffett's Berkshire Hathaway. (Gillespie is a director of White Mountains.) Prior to founding Prospector, Gillespie worked for Buffett's Geico as a senior financial analyst and was a manager of several T. Rowe Price (TROW) funds.

Gillespie's co-managers are equally impressive. Richard P. Howard, lead manager of Prospector Capital Appreciation, headed up T. Rowe Price Capital Appreciation from 1989 through 2001 and was an analyst with the fund from its 1986 inception. During his tenure, the fund had one down year, a 1.3% drop in 1990. Kevin R. O'Brien, who heads Prospector Opportunity Fund, worked for Neuberger Berman from 1996 through 2003, co-managing Neuberger Berman Genesis, a top-performing small-cap fund.

Some managers accept losses as long as they beat a benchmark, but avoiding any declines is Prospector's first priority. It pursues "absolute," rather than relative, returns. "We've never had a down year in any of our investment products since we started the firm in 1997," says Gillespie.

Capital Appreciation's Howard pursues a strategy similar to one he created for T. Rowe Price, buying stocks of any size trading at a discount to what he thinks a smart buyer would pay in an acquisition. He combines those with convertible bonds to dampen portfolio volatility. The fund now has 30% in such bonds, and its largest holding is electric utility stock Mirant (MIR), which Howard says will see rising cash flow due to greater demand for electricity. At Opportunity, O'Brien focuses mostly on small- and mid-cap companies able to fund their own growth. He likes UST (UST), which has a 90% share of the smokeless tobacco market.

"WE LOOK EVERYWHERE"

Absolute returns are also the focus of the $100million Utopia Core Fund (UTCRX). The fund opened at the start of 2006, but manager Paul H. Sutherland has been investing for private accounts with about $700 million in the same value-oriented style for more than a decade. Over the past 10 years the average return of those accounts has more than doubled that of the S&P 500 with considerably less downside. In his worst year, 2002, Sutherland lost 6.7% to the market's 22% slide. (As with all the funds in this article, expenses fall near the average for its fund category.)

Utopia has a wide-ranging mandate. "We look everywhere for opportunities," says Sutherland. It's not uncommon to find Treasury bills alongside Asian real estate investment trusts (REITs) and short positions that bet on a falling stock price.

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