Regional Funds Struggle to Compete
In the vast, crowded mutual-fund market, a tiny group of fund companies think home-town appeal may attract investors.
They're regional mutual funds, funds that invest in companies located in a single state, city, or region of the country. And investors often like them either because they are like investing in the local economy or because it offers the chance to target some other area's hot prospects.
But while a handful of these funds chart impressive returns, analysts warn that picking a fund based solely on backyard appeal is risky.
Do they rate nationally?
"It's important to look at these funds in a broader context," says Laura Lallos, a senior analyst at Morningstar Inc. in Chicago. "If they can't compete with a broader universe of domestic stock funds, then there is no other reason to invest in them."
Regional mutual funds have been around for years. The first such fund - IAI Regional Fund - a Minneapolis-based fund that targets upper Midwest businesses - was created in 1980.
Yet these funds have never really caught on. Of the thousands of stock funds available, only about two dozen (whose combined assets total $3.3 billion - a mere drop in the mutual-fund bucket) define themselves along specific geographic lines.
In order to be identified as a regional mutual fund, the Securities and Exchange Commission requires that 65 percent of a fund's stock holdings be located within its predefined geographic area. (Most regional funds invest a much higher percentage.)
Regional funds invest most of their assets in small and mid-size companies, primarily growth companies overlooked by Wall Street analysts. Most large companies don't fall into that category.