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

The Beauty of Boutiques

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While a flexible investment style is popular, some boutique managers aim to excel in a niche. Stralem Equity Fund (STEFX) buys only large-cap blue-chip stocks. Fund adviser Stralem & Co., founded in New York in 1966, is also largely a family-run business. Two families hold four of the slots on the eight-member team. Employees of the firm own more than 15% of the outstanding assets invested in the $93 million mutual fund. The firm also manages $2 billion in the same style in private accounts. Over the past 15 years the private accounts have delivered an average 11.4% annualized return net of fees, vs. the Standard & Poor's 500 index's 6.9%—and with less volatility than the market.

NIMBLE PLAYERS

Small-cap stock funds are popular with niche boutiques. One reason for this is liquidity. Tiny companies can be difficult to trade, especially if a manager works for a big fund family with a lot of assets to invest. Positions can take longer to build or eliminate, and buying too many shares of one company can drive up the stock's price, causing the manager to overpay. A boutique house can be nimbler investing in such companies.

Walthausen Small Cap Value Fund (WSCVX) takes full advantage of its small size. With just $12 million in the fund (the entire firm has about $90 million in assets), manager John Walthausen recently built significant positions in cookware manufacturer Lifetime Brands (LCUT) and Lydall (LDL), a maker of thermal insulation and filtration devices, in less than a week. "Both companies have market capitalizations below $100 million," he says. "If I were managing $1 billion, it would be very hard for me to invest in such tiny companies in a way that would make a difference to the portfolio." Although Walthausen's fund only launched in February 2008, he ran Paradigm Value Fund (PVFAX) from January 2003 through July 2007, earning a 28.8% annualized return, which trounced the 18.5% return of his small-cap value benchmark and his peers.

Another solid niche boutique play is Conestoga Small Cap Fund (CCASX). The $60 million fund launched in 2002, but managers William Martindale Jr. and Robert Mitchell have been managing money in private accounts in the same style since 1998, delivering a 7.8% annualized return since then. That compares with 0.3% for their benchmark, the Russell 2000 Growth Index.

Many boutique funds, including the Bruce Fund, must be bought directly from the company. Stralem is available through some discount brokers. If the funds have a drawback, it's that small, undiscovered funds may not gather enough assets to survive. Unsuccessful funds can get liquidated quickly, perhaps not giving managers enough time to prove themselves. But the flexible approach of many of these funds, as well as the large personal stakes their managers often have in them, help tilt the odds in their favor.

Braham is a freelance writer in Brooklyn, N.Y.

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