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Five Hidden Gems That Are Obscured by Past Failures

Don't overlook these five funds just because previous managers had poor performance.

Russel Kinnel, 02/02/2010

Sometimes even five years isn't enough to make people forget about a fund's poor history.

A couple of weeks ago I mentioned that Loomis Sayles Small Cap Growth LCGRX was a good fund that no one had noticed because its strong five-year record was obscured by a still crummy 10-year number. Thus, the fund had just $132 million in assets. Management had only been on board for six years, so that didn't make sense.

That made me curious whether there were other funds like that. I found five that fit the bill. It's a handy list because you're finding funds that have a lot of promise yet still have a modest asset base.

Harbor International Growth HAIGX is a strong choice for an aggressive foreign fund, but it's easy to miss it given its weak 10-year numbers. However, since James Gendelman took over in 2004, the fund is comfortably ahead of its benchmark. Gendelman is also ahead of his benchmark at Marsico International Opportunities MIOFX, which he's run since 2000. Gendelman looks for fast-growing companies in industries with strong prospects. I'm impressed that he could make that strategy work in the past decade when value was much stronger. One disappointment is that he doesn't have money in the Harbor fund, though he does have between $100,000 and $500,000 in the Marsico fund.

Broker-sold MFS Growth MFEGX has five-year returns of an annualized 4.1%, which is top-quintile, but its 10-year loss of 3.9% annualized is still pretty lousy. However, like MFS as a whole, this fund has enjoyed a nice turnaround. Since Eric Fischman became a manager in 2002, it has posted above-average returns in every ensuing calendar year. Like Gendelman, Fischman is willing to pay up for growth but he also looks for high-quality sustainable growth. (Fischman has between $100,000 and $500,000 in the fund.)PAGEBREAK

TCW Small Cap Growth TGSCX has flown under the radar because it had a terrible start to the decade. From the beginning of 2000 through February 2005, the fund lost 55% of its value while the average small-growth fund gained 17% cumulatively. However, since Husam Nazer took over in 2005, the fund has gained 52% while the average small-growth fund has been flat. Nazer installed a strict sell discipline around cash-flow driven estimates of a stock's value. That's helped keep risk in check and has enabled the fund to outperform in the past four calendar years. (Nazer has between $100,000 and $500,000 in the fund.)

In 2005, Rob Gensler moved from T. Rowe Price Media & Telecommunications PRMTX to  T. Rowe Price Global Stock PRGSX. Although he fared well at his prior fund, Global Stock has remained rather obscure. It's still less than $1 billion in assets. Part of that is because his growth style hasn't looked all that great in a world-stock category that includes value and blend styles. Even so, the fund is still ahead of its peer group since Gensler took over. What's exciting, though, is seeing what he can do with this small fund in a growth market. (Gensler has more than $1 million in his fund.)

Dennis Lynch came on board broker-sold Morgan Stanley Mid Cap Growth DGRAX just as the bear market was ending in 2002. He's put up strong numbers since then, but the $260 million fund's 10-year numbers are still unimpressive. Lynch looks for companies with high returns on capital and strong cash flows, and that's worked far better than the momentum strategies you see in mid-growth. Still, the upside and downside are readily apparent given the 48% loss in 2008 and the 59% gain last year.

Russel Kinnel is director of mutual fund research with Morningstar.

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