A few weeks ago, I advised investors to beware of mutual fund asset bloat, because the mutual funds with the largest size in assets under management are rarely the best in performance. But the opposite is also true: Some of the best funds are often those that are smaller in size, compared to the averages in their respective categories.
Something else I shared in the asset bloat story is a piece of sage advice from Warren Buffett: “It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”
Bill Gross feels the same way, as reported by Reuters.: Upon recently reflecting over his PIMCO tenure with fellow fixed income star, Jeffrey Gundlach, Gross admitted that “smaller is better.”
Not every portfolio manager can be a Buffett or a Gross, but there is definitely ample evidence in the mutual funds universe that supports the idea that smaller can often be better and a common correlation between below-average assets under management and above-average returns definitely exists.
Here are the best funds with high returns and low assets under management.
Best Funds With Low AUM: AMG GW&K Enhanced Core Bond Investor (MFDAX)
When Bill Gross recently lamented that “smaller is better,” he could have referenced AMG GW&K Enhanced Core Bond Investor (MFDAX) as an example. This small but mighty bond fund recently had only $87.4 million in assets under management; whereas the average intermediate-term bond fund has more than 10 times that amount.
In a review of the 1-year, 3-year, 5-year and 10-year annualized returns, MFDAX has outperformed no less than 89% of category peers. Although the current lead manager, Mary F. Kane, has been at the helm for just a little under 2 years, she’s supported by steady-handed co-managers, such as the legendary Dan Fuss.
The stellar performance is also helped by high-yield bond holdings, but the average credit quality is still a solid investment-grade (or BBB) rating. Investors looking for income will also like the 2.52% yield. Just be cautious of rising interest rates, when the lower-quality bond holdings are likely to be a drag on performance. However, based upon this fund’s history, long-term investors are sure to remain happy.
The minimum initial purchase for MFDAX is $2,000.
Best Funds With Low AUM: Pin Oak Equity (POGSX)
Pin Oak Equity (POGSX) outperforms 90% of its mid-cap blend category peers for 10-year annualized returns and beats the category for 1-year, 3-year and 5-year performance on top of that. Assets under management were most recently at $92.1 million, compared to $644.8 million for the average mid-cap blend fund.
The average market capitalization for POGSX, at $24.6 billion, is high enough to make some investors consider it a large-cap fund but a more accurate description might make it a well-managed multi-cap stock fund. Top holdings include the gigantic Wells Fargo & Co (WFC) but also mid-sized companies, such as Amdox Ltd (DOX).
For those wanting to compare POGSX to a large-cap fund, it beats the S&P 500 Index in 6 of the 10 years from 2004 through 2013 but does so in a commanding manner, such as in 2009 when POGSX jumped 79.4%, compared to 26.5% for the S&P 500.
Investors can get into POGSX with a $2,000 initial purchase.
Best Funds With Low AUM: TFS Small Cap (TFSSX)
Weighing in at a lightweight $91.3 million in assets, which is less than one-third the size of the average small-cap blend fund, TFS Small Cap (TFSSX) uses its size as an advantage.
The 1-year and 3-year annualized returns place TFSSX ahead of the vast majority of small-cap blend funds. The fund inception is March of 2006 and it managed to beat 85% of its category peers in 2007.
One small caveat for the fund is that its long-term performance is primarily supported by bull market periods, such as 2009, when it gained 65.4%, compared to the average small-blend fund, which returned 31.8%. But the fund came just slightly behind the category in recent down years, 2008 and 2011, with -38.4% and -5.1%, respectively, compared to -36.6 and -4.1% for the category during those years.
The turnover is high at the most recent 601%, which pushes the expense ratio above-average to 1.75%. However the management has had ample time to prove its skills in its 8-year history.
New investors can get into TFS Small Cap with a $5,000 initial purchase.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.
