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Buying a Good Manager's Weakest Fund

Here's one way to make a contrarian play.

Russel Kinnel, 05/30/2006

This article originally appeared in Morningstar FundInvestor, an award-winning newsletter that presents investment strategies and tracks 500 funds.

A couple of years ago at the Morningstar Investment Conference, Bridgeway manager John Montgomery pointed out that inflows track recent returns: The top-performing fund gets the most money, and the worst gets redeemed. However, he noted, investors would have been smarter to do the opposite, because then they'd be buying relatively cheaper securities and selling pricier ones.

With that in mind, I screened for some good managers' lowest-returning funds in absolute terms over the trailing three years.

Bridgeway Blue-Chip 35 BRLIX

Star Rating 3-Yr Ret % 5-Yr Ret % Manager Name
9.69 1.55 John Montgomery

This fund is a simple way to bet on a mega-cap rebound. It's an index of the 35 largest stocks, and it charges just 15 basis points. If you've already got an S&P 500 fund or an actively managed fund with lots of blue chips, I wouldn't bother adding this one. On the other hand, if you have a small-cap-heavy portfolio, a slug of this will go a long way to balancing things out.

Selected American SLASX

Star Rating 3-Yr Ret % 5-Yr Ret % Manager Name
17.98 5.73 Davis/Feinberg

Ken Feinberg and Chris Davis run or are part of a team on a few funds, including Clipper Fund CFIMX. I left Clipper out of my screen because Davis and Feinberg have only been running that one since January. Selected American has lagged the other Davis/Feinberg funds by a bit in part because of its high market cap. Even so, it's done quite well on both a relative and absolute basis. The fund's trailing three-year returns are an annualized 18%, which ranks in the top quartile of large-blend fund returns. So, this isn't my most contrarian of bets. Even so, I expect that this fund can keep going strong in all sorts of markets.

Weitz Partners Value WPVLX 

Star Rating 3-Yr Ret % 5-Yr Ret % Manager Name
12.41 3.62 Wallace Weitz

This one is as contrarian as you can get for a value fund. This is Weitz's tax-managed vehicle, but it's pretty similar to Weitz Value WVALX. Both funds have suffered from huge bets on media and financials, but I still think Weitz knows a thing or two about finding good values. And I've seen media go out of favor before, only to  come back with a merger frenzy. Weitz's long-term record is still solid, so I'm keeping the faith in spite of recent results.

Vanguard Growth Index VIGRX 

Star Rating 3-Yr Ret % 5-Yr Ret % Manager Name
11.46 1.61 Gerard O'Reilly

I screened all of Vanguard's equity index funds, and this was the three-year dog. I used to dislike this fund because the composition of its index was simplistic. (The index was composed entirely of stocks with low price/book ratios, but P/B doesn't works well for a number of industries so it made for strange results.) However, in 2003 Vanguard switched to a more robust index from MSCI that's a better gauge of growth. So while many large-growth funds have strayed into blend or mid-cap stocks, this fund has appeal as a pure play on a beaten-down area. This fund is also available in ETF form under the ticker VUG.

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