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Three Overlooked Funds Worth Watching

These funds haven't garnered much attention--yet.

Kunal Kapoor, 05/31/2004

<P class=MsoBodyText style="MARGIN: 0in 0in 0pt" >With such a large number of  /?>mutual funds available, many good funds fail to register on investors' radar screens. These overlooked funds often boast the same charms as  /?>more-popular offerings, including experienced management, without the burden of a large asset base. A smaller asset base typically gives these funds far more flexibility, allowing them to sample stocks from across the market-cap spectrum. </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" > </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" >Three funds that fit this mold include Oak Value, T. Rowe Price New America Growth, and Third Avenue International Value.</P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" > </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" ><STRONG>Oak Value </STRONG><?XML:NAMESPACE PREFIX = MSTR /?><MSTR:SECURITY>OAKVX</MSTR:SECURITY></P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" ><STRONG><MSTR:SECURITY></MSTR:SECURITY></STRONG> </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" >This fund's managers keep it simple. Like many of their value brethren, they intend to ferret out stocks that are trading at a discount to their estimate of intrinsic value. They also love to see free cash flow--growth is a plus but not a necessity--and have traditionally favored insurance, media, and consumer-product stocks.</P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" > </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" >For example, the fund has sizable stakes in Warren Buffett's Berkshire Hathaway B <MSTR:SECURITY>BRK.B</MSTR:SECURITY> and  EW Scripps <MSTR:SECURITY>SSP</MSTR:SECURITY>, owner of the Food Network and other media outlets. The latter is a great example of how the fund's managers invest. While the stock has delivered a commanding 15% annualized gain for the trailing three-year period--enough for some managers to cash in their chips--the managers here have kept the stock because their estimate of the underlying business value has also appreciated.</P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" > </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" >They have no trouble selling overvalued stocks, but they won't turn tail just because a stock has risen quickly.</P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" > </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" ><STRONG>T. Rowe Price New America Growth </STRONG><MSTR:SECURITY>PRWAX</MSTR:SECURITY></P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" ><MSTR:SECURITY></MSTR:SECURITY> </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" >Manager Joe Milano is a growth investor but knows that even growth has a price.</P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" > </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" >Since taking over this offering about two years ago, Milano has been able to put the fund's flexibility to good use, driving it to a 35% gain in 2003. But it's not the fund's performance that's worth focusing on. (In fact, such strong absolute performance likely isn't sustainable.) Rather, investors looking for a core-growth fund will like the diverse makeup of this portfolio, which includes a generous sampling of service stocks.</P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" > </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" >Moreover, the fund is much smaller than T. Rowe's other heavyweights--Growth Stock <MSTR:SECURITY>PRGFX</MSTR:SECURITY> and  Blue Chip Growth <MSTR:SECURITY>TRBCX</MSTR:SECURITY>--which are mostly pure-play large-cap funds. /?>Here’s hoping that T. Rowe will keep this fund’s asset base small enough to preserve its flexibility.    /?></P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" > </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" ><STRONG>Third Avenue International Value</STRONG><STRONG> </STRONG><MSTR:SECURITY>TAVIX</MSTR:SECURITY></P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" ><MSTR:SECURITY></MSTR:SECURITY> </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" >Third Avenue founder Marty Whitman is noted for his successful cheapskate ways, and the same thriftiness also permeates manager Amit Wadhwaney's approach at this offering. </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" > </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" >Managed as an all-cap offering, this fund has shown the same penchant as its siblings for hoarding atypical stocks trading at a deep discount to intrinsic value. A recent case in point: Top holding Tranz Rail Holdings, a New Zealand-based freight railroad company that isn’t widely held or researched. Buy-and-hold enthusiasts are also likely to warm to Wadhwaney's infrequent trading style--the fund's turnover hasn't exceeded 4% during his tenure.</P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" > </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" >Of course, the fund's quirkiness means you should expect it to lag from time to time. But outside of its still-high expenses--which we would expect to decline as assets continue to rise--there’s a lot to like here.</P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" > </P> <P class=MsoBodyText style="MARGIN: 0in 0in 0pt" ><EM>Kunal Kapoor is Morningstar's director of fund analysis.</EM></P>

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