How to employ our Fund Manager of the Decade nominees wisely.
So, now that we've named our nominees for Fund Manager of the Decade, are you thinking about adding one or more of their funds to your portfolio? If you're sitting with a collection of mediocre funds right now and wouldn't incur onerous tax burdens by overhauling your portfolio, that could be a good idea--heck, we wouldn't have made these managers nominees for our award if we didn't think so.
But you should mind certain risks and idiosyncrasies of these funds. Both advisors and individual investors are often guilty of expecting too much out of their investments. Having reasonable expectations is perhaps the best bulwark against bad investor behavior, such as giving up on a fund at the worst moment. What follows is an effort to set rational expectations for our domestic-equity Manager of the Decade nominees' funds and to help you use them wisely.
Manager of the Decade Nominees
FPA Crescent FPACX
Fidelity Low-Priced Stock FLPSX
Royce Special Equity RYSEX
Expect Style Drift
First, if you like organizing your portfolio strictly around the Morningstar Style Box so that you know exactly how much large-cap and small-cap exposure you have at all times, almost all of our domestic equity nominees will give you fits. You may consider avoiding most of them altogether or only using them on the margins of your portfolio.
For example, Fairholme FAIRX, run by Bruce Berkowitz, and Yacktman YACKX, run by Don Yacktman, will own stocks of virtually any size, making strict asset allocation along the guidelines of Modern Portfolio Theory difficult. Fairholme and Yacktman own giants such as Berkshire Hathaway BRK.B and Coca-Cola KO, respectively, but they both also own smaller fry like subprime auto lender AmeriCredit ACF. Fairholme also owns mid-cap Florida land company St. Joe JOE, while Yacktman also owns small-cap firm Furniture Brands International FBN. Both funds will even dabble in bonds when Berkowitz and Yacktman think opportunities in the fixed-income realm can produce equitylike returns. Both funds will hold cash when the managers think prices are rich.PAGEBREAK
Over the past decade, Fairholme has found itself in the mid-blend and large-growth boxes, while Yacktman landed in the mid-value box a decade ago when large caps were arguably much more expensive than they are now. Yacktman has been in the large-blend box, too.
Steve Romick's FPA Crescent FPACX presents similar problems, with energy behemoths Chevron CVX and ConocoPhillips COP rubbing shoulders with midsize insurer Assurant AIZ. Moreover, this fund falls into the moderate-allocation category because it often owns bonds and holds cash, but it doesn't have the typical allocation to vanilla bonds that most balanced funds favor. Instead, Romick isn't afraid to traffic in lower-quality bonds such as those of International Lease Finance, American International Group's AIG aircraft-leasing arm.
Fidelity Low-Priced Stock FLPSX won't typically invest in bonds or hold outsized cash stakes, but its sprawling portfolio contains stocks from every part of the style box. Although the fund has migrated from the small-value and -blend parts of the style box into the mid-cap areas over the past decade, its top holdings include large-cap health insurer UnitedHealth Group UNH and data storage software firm Oracle ORCL.
Only Charlie Dreifus at Royce Special Equity RYSEX sticks almost exclusively to small-cap stocks. It's worth noting, however, that the market carnage in early 2009 gave him the opportunity to pick up mid-cap names Tiffany TIF, Bed Bath & Beyond BBBY, and Cintas CTAS. Granted, these aren't large-cap stocks, but they are a bit bigger names than usual for this fund. Dreifus may be finished fishing in mid-cap waters for now, but if the market takes another tumble and puts more mid-cap names on sale, don't be surprised to see him cast his lure again in search of larger fish to complement long-standing smaller-cap holdings such as kitchen appliance maker National Presto NPK and upscale supermarket operator Arden Group ARDNA.