Three great funds that have been flying under the radar.
A version of this article originally appeared in the May 6, 2008, issue of Morningstar Mutual Funds, Morningstar's flagship resource for serious fund investors. Click here to learn more about Morningstar Mutual Funds.
In Part I we highlighted some of Morningstar's best ideas for relatively unknown mutual funds for 2008. Below, we continue that list and identify an additional three funds that deserve more attention from investors.
Keeley Mid Cap Value KMCVX
Longtime readers are likely more familiar with sibling Small Cap Value KSCVX, but this new fund from namesake manager John Keeley Jr. has equal merit. Although this mid-blend offering is less than three years old, Keeley has been managing mid-cap money for more than 20 years. He plies the same process at both funds--focusing on firms emerging from bankruptcy and spin-offs and those that are converting to public ownership. His tenure in this corporate-restructuring space and active role in monitoring a firm's progress during restructuring is what sets this fund and its siblings apart. These stocks are usually not in an index and garner less attention, allowing Keeley to capitalize on mispricings. He also pays little mind to peers' profiles. Technology and health-care stocks make up just 5% of assets, compared with its typical category peer's 19%, because he perceives a short-term focus of their products and threat of government regulation, respectively. Keeley will also make active sector bets. The fund's continued exposure to the cyclical industrial and energy sectors stems from his belief that infrastructure and energy-related building and exploration will remain a tail wind. Overall, stock selection thus far has been strong, and the portfolio's flat profile is a prudent balance to its sector biases--top holdings are usually 3% of assets or less.
Diamond Hill Large Cap DHLAX
This fund (and firm) hold significant appeal for investors--even before you get to its portfolio. When it comes to putting shareholders' interests first, Diamond Hill is one of the best firms around. For starters, it has made a commitment to keeping fund expenses low, here and at the firm's other offerings--even with a small asset base--which gives the fund an important head start each year in the ultracompetitive large-value category. Manager Chuck Bath also invests in the fund alongside fundholders, and the firm's letters to shareholders and Web site provide thoughtful and detailed information about its investment process.
Like some of the other managers on this list, Bath isn't a crowd chaser. You won't find today's darlings at the top of the portfolio, but rather industry leaders selling at cheap prices. International Paper IP, for example, garners a larger weight in the portfolio because he believes the company will benefit from improved pricing and continued signs of industrywide consolidation on a global basis. Bath has been a long-term energy bull because of the favorable supply and demand dynamics, and he will also hold cash when high-quality ideas are scarce. Bath's willingness to ignore category norms has benefited shareholders immensely, as the fund's trailing returns are among the category's very best. Do-it-yourself investors can also purchase the fund through certain fund supermarkets such as Schwab and sidestep the fund's front-end load.
Schneider Small Cap Value SCMVX
This small-value Analyst Pick reopened to new investors in early April. Small-cap value stocks have lost their momentum recently--as has this fund--but we think that investors should take this opportunity to gain access to one of the best small-cap managers around. Mistakes are part of the package for deep-value strategies such as the one that namesake manager Arnie Schneider employs. The fund's performance last year was disappointing as it got caught in the middle of a financial windstorm that took several of its largest positions down with it. Over time, though, Schneider's wins have far outpaced his losses, and the fund's long-term returns cast a long shadow over its category peers'. The fund's small asset base also ensures that he will have the flexibility to show conviction where appropriate when hunting among the market's smaller issues. Investors looking for small-value exposure should take advantage of this opportunity.
Andrew Gogerty is a mutual-fund analyst with Morningstar.
Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.