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These Five Newer Funds Are Worth a Second Look

A handful of ideas coming from the ranks of the unfamiliar.

Paul Herbert, 06/12/2007

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.

While most of the fund industry's assets--and new flows--tend to go to the biggest funds, we at Morningstar keep our eyes open for newer, less-well-known funds to keep a crop of new ideas on hand. One reason is that at this probably advanced stage of the ongoing bull market, decision-makers such as financial advisors may be looking for alternatives to closed offerings that used to be easy options to fill small- and mid-cap slots in clients' portfolios. With plenty of "under-the-radar" funds featuring enviable qualities--such as small asset bases in the hands of experienced managers--it pays to look beyond the heavyweights.

At least we like to think so, which is why we aim to keep current on new fund launches and to pen reports on these funds, particularly on compelling ones. During the past three months, we've written reports on 21 funds that we hadn't covered before. Some of these funds are new; others have been around awhile, but they're so tiny that they hadn't cracked our coverage list until now. Details on five of the most attractive of the bunch are below.

American Funds Short-Term Bond Fund of America ASBAX
This fund is about as close to a slam dunk as you can get in the new-fund realm. The fact that the offering comes from a reputable manager, American Funds, is part of the draw, but more decidedly, so is that the firm has set itself apart from the pack in launching funds responsibly. Before putting forth any new offering, American carefully considers whether it can exploit both short-term and long-term investment opportunities. In this case, it's a reasonable bet that American's bosses will be able to exploit inefficiencies among short-term bonds for some time into the future. And, with yields on short-term bonds matching those on long-term bonds, this fund, which came out in October 2006, is also a timely pick.

Harbor Global Value HAGVX
Toledo, Ohio-based Harbor Capital Advisors does a lot of the heavy lifting for fund investors by partnering with topnotch subadvisors like PIMCO for Bond HABDX and Jennison for Capital Appreciation HACAX and offering their services to no-load investors at a reasonable price. This offering, which commenced operations last August, is helmed by a group from less-well-known, but successful, manager Pzena Investment Management. The firm has put together a good record at mutual funds in the past, including large-value JHancock Classic Value PZFVX, which uses a similar strategy of looking for cheap U.S. stocks that have the potential to rebound when earnings return to normalized levels. These managers also have had success picking stocks from around the world, as they do here, in the separate-account format.

LKCM Equity LKEQX
This fund isn't technically new--it started up in 1995--but it's new to us and it's likely new to you given that its asset base was just $53 million recently. Like the Harbor fund, we have been familiar with the fund's management team for some time because we have covered LKCM Small Cap Equity LKSCX for several years. Like they do at that fund, the managers here look for businesses with strong balance sheets, improving profitability, and cheap prices. It's worked for shareholders, too: LKCM Equity has outpaced three fourths of large-blend funds for the 10-year period ended May 31, 2007. Even more impressive to us is that management has done well by its retail investors. The firm runs quite a lot of money in the separate-account world, and because it leverages that work here, it charges a fair 0.80% in expenses.PAGEBREAK

Manning & Napier Pro-Blend Max Term EXHAX
This fund has been around awhile, too, and it has been remarkably successful during its 11-year lifetime. Of particular note is that the fund topped the typical large-blend fund and the S&P 500 Index in each calendar year from 1999 through 2006. That record is the result of a robust process. Manning & Napier Advisors' 27 stock analysts construct models on individual firms to help them identify stocks trading at steep discounts to intrinsic value. Being cheap enough isn't a sufficient criterion for inclusion here, though, as the firm also relies on economic forecasts to tell it which inexpensive companies are likely to thrive going forward. Our lone complaint about this fund is that it's more expensive than the average large-cap fund.

Neuberger Berman International Large Cap NILIX
This large-cap foreign-stock fund came out a few months after Neuberger Berman closed its successful all-cap International NBISX. A fund launch that closely follows the shuttering of a similar sibling fund is often a red flag. It suggests that the first move was akin to window dressing: That is, the firm wanted to appear to be guarding shareholders' interests while its hidden intent is to gather more assets regardless of the potentially deleterious impact on either fund's results. In this case, we don't think Neuberger Berman deserves much criticism. The firm closed International at a pretty conservative level, and although the funds share managers and approach, which involves picking growth stocks with good managers and strong returns on capital, there isn't a high degree of overlap between them. Another point in this fund's favor is that, despite its youth, its expense ratio is lower than the typical no-load foreign large-cap fund's.

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