Mutual Funds September 17, 2009, 5:00PM EST

The Beauty of Boutiques

Small, family-run boutique funds can post impressive returns

By Lewis Braham

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If you call the Chicago office of the Bruce Fund (BRUFX), chances are one of its two co-managers—Robert Bruce or his son, Jeffrey Bruce—will pick up the phone. They are, after all, the fund's only employees. Yet despite this dearth of personnel—or perhaps because of it—the $200 million fund, which can invest in almost any kind of stock or bond, has delivered a 17% annualized return over the past 10 years, beating 99% of all mutual funds. Jeffrey Bruce thinks that knowing the fund's success depends entirely on him and his father makes a difference. "If you have your name on the door, you tend to care a little more," he says.

The Bruce Fund is a classic case of what might be called the boutique-fund effect: Small, often family-run mutual fund shops can produce superlative returns. This is especially true if the shop runs only one fund. Instead of selling a multitude of investment products that cover just about everything under the sun, managers at single-fund boutiques devote all of their time and energy to making their one fund succeed. For such managers, running a fund isn't just a job. It's their primary business, their lifeblood. If that fund fails, so does their business.

Since their livelihoods are at stake, boutique managers tend to be more risk-averse and holistic in their approach to investing. Instead of investing in a specific sector and trying to beat a specific benchmark, managers often aim to make money any way they can and to keep losses to a minimum. They pursue what is called "absolute returns." This requires a more flexible investment style than big fund shops generally allow. A manager may invest in, say, Treasury bonds during a bear market and tech stocks or junk bonds during a bull run.

Finding solid boutique funds takes some work. You can screen for top funds at research site Morningstar.com (MORN), but it pays to visit the fund's home page. At RooseveltInvestments.com, for instance, you will find background information about the Sheer family, which runs the $120 million Roosevelt Multi Cap Fund (BULLX). Lead manager Arthur Sheer ran money for Britain's Rothschild family for nine years before founding his firm, Sheer Asset Management, in 1990. Sons Adam and David are Sheer's president and chief financial officer, respectively. The Sheers now manage money for members of the Roosevelt family and other wealthy clans.

Although the Roosevelt fund was launched in 2001, the Sheers have been running $3.7 billion for privately managed accounts in the same style since the firm's founding. Since October 1990, the average annualized return for those private accounts has been 11.2%, vs. 9.2% for the stock market. In the past five years the mutual fund has delivered a 6.2% annualized return, besting 90% of its peers in Morningstar's mid-cap growth fund category.

Like the Bruce family, the Sheers practice a flexible, go-anywhere style and try to capture all of the stock market's upside while suffering less of its downside by hedging their positions or going into cash. Over the past decade their All-Cap Core Equity Composite, which tracks private accounts managed in the same style as the multi-cap fund, has beaten the market by 17% during bull markets and fallen only 73% as much during declines. "My father has always worried about the downside," says Adam Sheer. "When most people walk into a crowded theater, they think: 'I wonder if this is a good movie.' He thinks: 'My god, what if there's a fire?'"

The best boutique managers invest heavily in their funds. "All my liquid assets are in the fund or in separate accounts managed in the same style," says Adam Sheer. The same is true for the Bruce Fund. "My father is the largest shareholder in the fund, and I am No. 3 or 4 if you include my wife and kids, who are also invested," says Jeffrey Bruce.