I read the other day that equity mutual funds saw a net outflow in 2012 of $108 billion compared to an increase of $111 billion for equity ETFs. Most of the outflow came from large-cap growth and value funds. Clearly investors are becoming more comfortable with ETFs, and that’s affecting the popularity of mutual funds. While the general prognosis for equity mutual funds doesn’t look good, we can still find some pockets of strength.
ETFs do a good job at lowering fees and making accessible for investors previously unavailable asset classes and geographic regions. But some mutual funds offer advantages that no ETF can provide — from concentration to asset allocation. These three funds capture that certain something — and return it in the form of good performance.
Longleaf Partners Small-Cap (LLSCX)
You probably know Longleaf’s parent company, Southeastern Asset Management, which is currently making a big stink over Michael Dell’s plan to take his namesake private. Between Dell (NASDAQ:DELL) and Chesapeake Energy (NYSE:CHK), Southeastern’s Partners Fund (MUTF:LLPFX) has faced plenty of headwinds over the past few years. Still, the fund has easily outpaced the S&P 500 over the past 1, 3, 5 and 10 years.
While the fund, which invests in just 20 stocks, has net assets of just $3.4 billion, it’s made up for that in performance, delivering an annualized return of 12.1% over the past 20 years, 168 basis points better than the Russell 2000, its benchmark. Asset manager Mason Hawkins uses concentrated portfolios that tend to produce beta surpassing that of its benchmark. In the end, LLSCX has outperformed the Russell 2000 63% of the time. The best part about this small-cap fund? Its annual management expense ratio is just 0.92%, 40 basis points lower than the category average.
Matthew 25 Fund (MXXVX)
As you can probably guess, the Matthew 25 Fund (MUTF:MXXVX) is named after the gospel Matthew 25 from the Bible. I’m not a religious person, but the go-anywhere fund has experienced portfolio returns since its October 1995 inception that are downright heavenly. In 2012, Matthew 25 won the Lipper Award for best multi-cap core fund.
The fund itself typically owns between 12 and 22 stocks that vary in market cap from as low as $50 million all the way up to $100 billion and beyond. While it can invest in foreign stocks, it currently doesn’t. It’s also allowed to hold as much as 25% in a single investment, although currently Apple (NASDAQ:AAPL) is the largest at 17.5% of the portfolio.
I know what you’re thinking: Apple’s miserable performance of the past few months must be affecting the fund’s performance. Well, despite Apple’s 15.8% decline year-to-date, the fund’s still managed a return of 5.3%, just behind the S&P 500’s 5.8%. But this parity is likely temporary — over the past 15 years, MXXVX has achieved an annualized return of 8.4%, 380 basis points higher than the index. It’s a little more expensive at 1.22%, but I think you’ll find it’s worth it.
Bruce Fund (BRUFX)
You have to go all the way to Winnetka, Ill., if you want to meet the co-managers of this 30-year-old fund. Run by father Robert Bruce (hence the name) and his son Jeffrey since its inception in 1983, the Bruce Fund (MUTF:BRUFX) also won a Lipper Award in 2012 for the best flexible portfolio. The fund hold equities and bonds, and the Bruces even look at distressed companies.
A classic example is Amerco (NASDAQ:UHAL), the holding company that owns U-Haul. Buying its shares for as low as $2 back in 2003 after it went bankrupt, Amerco’s shares now trade for just under $150. (The Bruces still hold 210,000 shares, the fund’s largest position by far.) Other attributes to like about the family run fund include consistent management, a go-anywhere attitude, a reasonable 0.78% expense ratio, they don’t talk to analysts, they invest in special situations, and their stock turnover is low at 10% annually.
That’s all well and good, but it’s their performance which merits 5 stars from Morningstar. Its 10-year annualized return is 16.2%, 801 basis points higher than the SPDR S&P 500 (NYSE:SPY). Out of more than 200 funds in its category (conservative/moderate allocation), it’s been ranked no worse than 99th over the past decade. On six occasions it was in the top 10. Year-to-date it’s trailing the SPY by 254 basis points and in the past three years it’s basically kept pace. That might worry some people; for me it suggests another breakout year is coming. All this despite 44% of assets being in corporate bonds, government bonds, and zero coupon strip bonds. If you’re looking for something balanced, this is it.
As of this writing, Will Ashworth did not own a position in any of the securities named here.