I’m always on the lookout for tomorrow’s winners in the mutual fund derby. Typically, financial journalists spill most of their ink on funds that have already attracted huge amounts of assets. But that’s a surefire recipe for mediocrity.
As funds get bigger, they become more unwieldy. Equity managers, in particular, find themselves pressured to invest in a longer and longer list of stocks, diluting the impact of their top picks. So I prefer to concentrate my search on smaller funds that haven’t yet made it to the cover of Money or Kiplinger’s.
Back in November 2000, near the beginning of a long run for small-cap stocks, I “discovered” and recommended the American Century Small-Cap Value Fund (MF: ASVIX). At the time, the fund had a piddly $66 million of assets. Since then, ASVIX has more than tripled in price and grown to $2.9 billion in assets. To stem the inflow of money, in fact, American Century closed the fund to new accounts in December 2009. As is so often the case, the early bird got a whole lawn of worms!
Today, of course, the market situation is considerably different from what we faced in November 2000. Back then, small-cap stocks — cast aside during the Internet mania — were deeply undervalued. They were due for a rebound.
After a double in the major market indexes since March 2009, on the other hand, bargains are scarce. Accordingly, I’m searching for little-known mutual funds that not only have turned in outstanding profits, but also have shown less volatility than their peers. It’s the “eat well, sleep well” formula I’ve advocated all along.
Here are my two top mutual funds to buy. At present, both sport less than $400 million in assets. However, I predict these mutual funds will grow by leaps and bounds as the buzz begins to spread:
Ave Maria Rising Dividend (MF: AVEDX): This growth-and-income fund owns shares of companies whose practices are in harmony with (or at least don’t conflict with) Catholic ethical teachings. Ordinarily, I’m skeptical of funds that attempt to screen out certain businesses on “social responsibility” grounds. However, AVEDX has compiled a superb record over the past five years. Not only did the fund lose far less than the market in 2008, but it has also kept pace with the recovery since March 2009. AVEDX is up 108% from the low. That’s an extraordinary feat for a conservative fund, and it suggests that manager George Schwartz is on to something with his strategy of buying companies that steadily increase their dividends. I like the low $1,000 initial minimum, too. It currently yields 1.1%.
Robeco All-Cap Value (MF: BPAVX). What draws me to this fund is its flexible strategy. Unlike many stock funds, whose charters require them to stick with large companies, small companies, technology, utilities and so on, portfolio manager Duilio Ramallo is free to go wherever he finds value. He can even invest up to 20% of the portfolio overseas, although currently BPAVX is nowhere near that (about 8% foreign).
In today’s market, an all-cap mandate makes sense more than ever — because there aren’t a lot of bargains to go around. The last thing you want is for your manager to buy overvalued merchandise in order to satisfy an arbitrary capitalization (i.e., firm size) requirement. And yet, that’s what I suspect many folks who run dedicated large-cap or small-cap funds are doing.
Ramallo has proved his mettle in real time. His fund outperformed the S&P 500 by a whopping 1,000 basis points in misery-choked 2008, then trounced the bogey by 400 basis points on the way back in 2009. Trust him to steer you gently through any turbulence that may lie in store during the next few years.