Small Treasures Fidelity and American don't have a monopoly on great funds. Here's why you should consider investing with boutique firms
(MONEY Magazine) – Big fund companies do their best to make investing effortless. With just one call to an 800 number you can assemble a complete portfolio, or instantly move your assets from, say, a tech fund to an international bond portfolio. But if it's performance you're after, you may be better off spreading your investments among several smaller, specialized fund groups.
The best of these "boutique" shops--roughly speaking, firms with less than $5 billion in mutual fund assets--offer two key advantages.
-- At many small firms, the people who run the company are your fellow investors in the fund. That gives them an extra incentive to keep their costs down and their noses clean. Tellingly, nearly all of the fund-trading scandals of the past year have hit big fund families.
-- They won't give you indexlike returns at actively managed prices. Boutique funds tend to be smaller, which means that managers can concentrate on their favorite stocks or sectors, or bet big on smaller companies. And since the firm isn't trying to offer a fund to fit every investing style, managers may have more flexibility to respond to changing market conditions.
Here is a model portfolio of four top-quality boutique funds.
Core holding MOSAIC INVESTORS
Managers Jay Sekelsky and Richard Eisinger make their bets count. They typically invest in 25 to 35 stocks vs. the average domestic equity fund's 173. That's potentially risky, but the fund ranks in the top 12% of Morningstar's large-cap blend category for the past three, five and 10 years.
With just $135 million to manage, the duo can roam freely into midcap territory. A favorite of theirs is Markel. The specialty insurer (market cap: $2.6 billion) had its most profitable year in 2003, and with a price/book ratio of 2 it looks cheap. "Most large funds aren't nimble enough to purchase a stock that doesn't have a lot of liquidity," says Sekelsky. "We think it's a real opportunity."
Aggressive play BRIDGEWAY SMALL-CAP GROWTH
The Bridgeway group sets the standard for shareholder-friendly management. The firm caps executive pay, posts its code of ethics on the company website and ties fund expenses to performance. Its Ultra-Small Company fund, with annualized returns of 35% over the past five years, beats every domestic fund, period. But as that fund is closed to new investors, we think the recently launched Small-Cap Growth is a solid alternative. The new fund employs much the same strategy as Ultra-Small.
International diversifier CAUSEWAY INTERNATIONAL VALUE
Three managers and a team of six analysts screen for companies that are cheap relative to their industry and have a history of returning capital to shareholders. Then they dig in, visiting companies and talking with suppliers. Right now the fund has a 31% stake in the U.K. Since 2001 the fund has returned a cumulative 47% vs. 33% for its peers.
Bond bulwark METROPOLITAN WEST TOTAL RETURN BOND
When it comes to bonds, expenses are key. This $1.4 billion offering charges just 0.65% vs. 0.85% for the average taxable bond fund. Those low fees have certainly boosted performance: Over the past five years the fund has returned an annualized 7%, a top 10% finish among intermediate-term bond funds. Today the fund has a 42% stake in corporate bonds, including 16% in junk. That should help protect the fund against interest-rate spikes. --ADRIENNE CARTER