Small, family-run boutique funds can post impressive returns
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.
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.
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.