NEW YORK (CNNfn) - Most mutual funds have dozens, even hundreds, of stocks in their portfolios, but manager Michael Sutten likes his lean, giving his best ideas the greatest impact.|
Sutten, of the PBHG Large Cap 20 Fund, is among a growing number of managers who "focus" their picks to as few as 15 or 20 stocks. And investment pros say focus funds can make a nice addition to your long-term portfolio - as long as you pick the right ones.
"If you're right, you really get rewarded," Sutten said recently. The fund, with $790 million in assets, earned 102.9 percent in 1999 and is up 3.31 percent year to date as of Tuesday. Its three-year annualized return is 65.45 percent.
Janus Twenty Fund was among the first to make a name in focus investing. The fund got its start with Tom Marsico at the helm for nine years until 1997. It languished at the bottom of the performance charts in 1993 and 1994 but has been in the top third of its category since then, with a five-year annualized return of 44.43 percent, Morningstar said.
Marsico opened his own company after he left Janus, and the Marsico Focus Fund has earned more than 50 percent a year since 1998, Morningstar said.
Focus investing is so popular that Janus Twenty was among the most popular funds in 401(k) plans in 1999, according to a new analysis by Kanon Bloch Carre.
Now, even value fund shops are getting into the act, although with mixed results. For example, there's Oakmark Select Fund, a mid-cap value fund managed by Bill Nygren. The fund was ranked first in its category in 1997 and has been in the top quartile since then, Morningstar said.
But, Yacktman Focus Fund earned just 4.6 percent in 1998 and lost 22 percent last year, Morningstar said. Yacktman Funds have been hurt in recent years because of a large stake in tobacco stocks.
Is smaller better?
The growing popularity of focus funds has raised the question of whether indexing as an investing style is losing some of its luster. Index funds have soared in popularity thanks to fund families like Vanguard Group.
Sheldon Jacob, editor of the No-Load Fund Investor, thinks that index funds and focus funds complement each other.
"I like both of them," Jacob said. "In this kind of market, it makes a lot of sense to use index funds as your core holding and try to pick good-performing focus funds for your actively-managed portion of the portfolio. A focus fund with 20 or 30 stocks has a better chance of beating the index than diversified funds."
Jacob said he does not think indexing is on the way out. He pointed out that the second-largest mutual fund in the country is Vanguard 500 Index Fund. The fund is poised to surpass Fidelity's Magellan Fund as the nation's largest mutual fund.
Scott Cooley, an analyst at Morningstar, said it makes sense to have a focus fund in your portfolio if you already own mutual funds with 200 or 300 stocks.
Cooley said you could also diversify a portfolio by owning focus funds that invest in different parts of the market - one for growth, one for value, and so on.
"It's really important for people to think of how their funds fit together," Cooley said.
But Cooley warned that using a focus fund as a core holding would be too risky. Janus Twenty, for example, has had a great run, but what happens when the market shifts?
And even more than with traditional mutual funds, it's crucial to pick a seasoned manager, Cooley said.
"It puts a premium on the talent of a manager and an organization," Cooley said.
Jacob warned that as much as a focus fund can outperform the market, it can also fall terribly short of the market.
"I think focus funds are really great and I recommend them all the time," Jacob said. "But you better make sure you've got a great manager."