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A brave new mutual fund

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Muhammed Muheisen/AP/File

(Read caption) A bird prepares to drop money into a piggy bank in this file photo. Brown argues that in order to compete in the markets, mutual funds will have to become riskier and more interesting.

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If the mutual fund industry is to survive in anything even remotely like its present form, it's going to have to get tough and creative.  Launching another hundred index-huggers every year simply won't do it, especially with the internal expense ratios and tendency toward mean reversion that make virtually all mutual funds inferior to their passive index ETF counterparts.

But the Gabelli Funds people are stepping up to the plate, check this out...

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From Investment News:

Gamco Investors Inc. is going high conviction with its newest fund, the Gabelli Focus Five Fund (GWSAX), intending to put up to half its chips on just five stocks.

“It's our five very best ideas,” said Dan Miller, the fund's portfolio manager. The fund will invest about 10% of assets in each company, with the rest of the fund in anywhere from 10 to 20 stocks Mr. Miller calls “really good ideas.”

The fund is based on Gamco's quarterly research report, “The Focus Five,” which has been published since 2006. Mr. Miller has spearheaded the report since its inception. Each quarter, the report lists five companies determined to be undervalued and have near-term catalysts to spur appreciation.

It's not the first focused fund, of course, but it is a new entrant in a category that has grown stale with Ken Heebner (CGM Focused Fund) wannabes.

The plan is to have 50% of the of the fund be in their Focus Five names (which will be stocks like Madison Square Garden ($MSG)  that they believe to absolute homeruns on a valuation basis).  That's pretty courageous and I like it.  Whether or not it will work is another story, but here's something on the Gabelli Focus Five track record...

Since it was launched, the report's picks have tripled the return of the S&P 500, when measured quarterly. Even though the report's returns are measured by five new stocks every quarter, Mr. Miller doesn't expect that much turnover in the fund's top five holdings. “We're not going to change our minds overnight,” he said.

I'm sure we'll be hearing more as the fund comes to market.