Don't ignore these funds just because they're tiny.
It's hard to miss funds with huge asset bases. Funds like Morningstar's Fixed-Income Manager of the Decade Bill Gross' PIMCO Total Return PTTRX get a lot of attention because of the amount of wealth they control and the impact they have on the markets in which they invest. There are, however, plenty of good, small funds flying under the radar. Locating them before they become household names can be rewarding. To do so, we ran a simple screen for diversified-equity funds that are still open to new investors and have assets of less than $100 million, managers with at least five years at the helm, annualized three- and five-year returns in the top quartile of their respective categories, net expense ratios of less than 1.5%, and minimum investments of $25,000 or less. The search yielded some interesting funds that are worth getting to know better.
Harding Loevner Global Equity Advisor HLMGX
It's surprising that this $89 million world-stock fund hasn't attracted more attention, given its top-decile three- and five-year annualized returns. That's not all there is to like. Managers Ferrill Roll, Peter Baughan, and Alexander Walsh, who have all been with the firm since the mid-1990s, have contributed to the bigger Harding Loevner International Equity's HLMIX topnotch record. They buy and hold high-quality growth companies, such as Procter & Gamble PG, that have healthy balance sheets and strong earnings and dividend growth. U.S., Japanese, French, and Swiss companies make up the bulk of the fund's 60-stock portfolio, but the managers will venture into other regions if the valuations are right. Notably, the fund finished both 2008 and 2009 in its category's top quartile, suggesting that the fund holds up well in different market environments. The fund's 3% annualized return since Roll, the longest-tenured member of the team, came on board in 2001 beats two thirds of its world-stock peers.
Robeco Mid Cap Value BPMCX
This $65 million fund has been impressive since Steven Pollack arrived in mid-2001. Its 7% annualized return during his tenure lands in the mid-value category's top fourth. Pollack, who is supported by a variety of Robeco analysts and managers, uses quantitative and qualitative analysis to home in on stocks with good relative valuations, strong returns on capital, and catalysts for change. The quant model also considers momentum and earnings surprises and revisions. Pollack's process led him to move into out-of-favor REITs in 2009, which paid off handsomely as the battered asset class bounced back. The fund gained 41% in 2009, the third-consecutive calendar year that it landed in the category's top quartile. Consistency is nothing new for this fund, though. It has outperformed its peers in nearly all of the rolling one-year periods since Pollack came on board.PAGEBREAK
Pinnacle Value PVFIX
This quirky fund is in a class by itself. John Deysher, who has more than 25 years of experience, started the $61 million fund in 2003 after working under renowned value investor Chuck Royce for 12 years. Deysher pursues the tiniest of companies. The fund's $221 million average market cap is one of the lowest in the small-value category. He is a strict value investor who demands that the companies he owns have pristine balance sheets and shareholder-friendly managers. Deysher, however, is a flexible investor who also has bought preferred stock, convertible bonds, and even international closed-end funds depending on where he's finding the most value. But if Deysher doesn't find any deals, he'll build cash, where about half the portfolio resided recently. The portfolio also currently includes an Ultrashort Treasury ETF, which he purchased in anticipation of rising interest rates. The unconventional moves have produced three- and five-year returns at the top of the category. Investors must be patient with lagging performance in roaring markets like 2009. But Deysher's caution pays off in tumbling markets such as 2008 when the fund lost less than all of its category rivals. Expenses are high at 1.49%, but Deysher's multimillion-dollar investment in the fund and refusal to take a salary aligns his interests with shareholders.
Brown Capital Management Mid-Cap BCMSX
This fund is one of the smallest to turn up in our screen, with just $9.6 million in assets. But that doesn't mean it should be ignored. Manager Eddie Brown started the employee-owned Brown Capital Management in 1983 after a decade at T. Rowe Price. Like the firm's other two funds, this one follows a long-term, growth-at-a-reasonable-price approach. Brown and four other managers look for companies with competitive advantages and solid financials, keeping the portfolio concentrated in just 45 stocks. So far, the strategy has worked. The fund has gained 9% per year since its late-2002 inception, landing in the mid-growth category's top third and doing so with less risk. The fund, for instance, lost less than all of its category rivals in 2008.
Katie Rushkewicz is a mutual fund analyst with Morningstar.