Davids Among Fund Goliaths
Kenneth Heebner just thumbed his nose at folks who claim there are too many mutual funds - at 8,000 and counting.
He just created another one: CGM Focus Fund geared up operations last week.
But rather than a mere asteroid in the mutual fund universe, the fund could be a hidden gem.
That's if you judge by Mr. Heebner's track record as a portfolio manager. A $20,000 stake in his CGM Capital Development fund 20 years ago, now weighs in at more than $1 million.
Last week this column explained why big funds - worth $1 billion or more - aren't necessarily too big to be be included in your portfolio. They often boast talented managers, and the blue-chip stocks they tend to buy have soared in this bull market.
But if you want funds with the best chance of outperforming the averages, some experts suggest a search for the hidden gems: small funds with star managers like Heebner.
So how do you find these funds?
It takes hard work to find them, says mutual fund expert Tim Schlindwein, of Schlindwein Associates, Chicago. First, he says, consider the nature of a gem.
A hidden gem mutual fund is, by definition, hard to find. It is undiscovered by the investor herd.
Most fund investors know about Fidelity's Magellan fund, the world's biggest, and plenty of people know about Vanguard's Index Trust 500.
But not many people know about the Yorktown Classic Value (800-544-6060), profiled in this space last week and up 30 percent for the year through Aug. 31.
And how about Texas Capital Value & Growth Fund (800-880-0324), up 42.3 percent through Sept. 8?
Both look tiny in terms of assets - $15 million for Yorktown and $22 million for Texas Capital - but diminutive size works to their advantage. They can move quickly and be more selective in their stock choices.
Finding such funds requires research - reading magazines such as Money, Mutual Funds, and Smart Money and wading through data provided by Morningstar or Value Line (on the Internet or in the library).
And smaller doesn't always mean better. Mr. Schlindwein notes that any good fund "does what it says it will do. It stays close to its knitting. It has consistency and discipline" in achieving its stated purpose.
Decide on your goals, then look for the best possible management, someone with a long-term record of success - not just a hot year.
Heebner's various Capital Growth Management funds tend to be top-ranked by analysts.
CGM Focus Fund (800-334-6440: $2,500 minimum) will concentrate on no more than 25 companies across various sectors - depending on what's cooking in the US and global economies. Right now, for example, he likes gypsum producers and Mexican oil-drilling operators.
At Texas Capital, manager Mark Coffelt sounds confident. "We've been in the right place at the right time with our picks," he says. The fund has a value style, seeking underpriced companies. Well-timed picks include stocks in technology, finance, and basic materials. The fund has grown this year from $5 million in assets to $22 million.
To appraise a possible gem, check out performance ratings and costs: annual management fees and up-front sales charges.
And watch the size. As funds get bigger, performance can slip.
Glenn Regan, a fund expert at Smith Barney Consulting Group in Wilmington, Del., says the asset allocation of the fund (what types of assets it buys), plus its stock-picking process are key factors. If it buys stocks geared to ride the crest of the next economic wave, the fund will likely prosper, he says.
He likes Wasatch Growth Fund, up 23 percent through Sept. 8 (800-382-3616), and Invesco Value Equity, up 24.1 percent through Sept. 8 (800-525-8085).