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3 Noteworthy Fund Boutiques

Russel Kinnel
Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

Big fund firms like Vanguard and T. Rowe Price house the lion's share of assets, but smaller shops merit attention, too.

Joining me to discuss the best of the fund boutiques is Russ Kinnel, director of fund research for Morningstar.

Russ, thank you so much for being here.

Russ Kinnel: Good to be here.

Benz: Russ, you brought a short list--and of course there are more boutiques that we like--but you brought along three firms that you think do a really good job in their respective areas.

The first one you want to talk about probably won't be a familiar name to many of our viewers; that's Akre. They run a single fund, single strategy. Let's talk about why you think the firm is good at running that mid-cap growth strategy.

Kinnel: It's Chuck Akre, assisted by three analysts. It's a focused growth strategy. It's a little different from anything you see elsewhere in terms of, they'll run cash, it's a focused growth fund, but it doesn't chase the really fast growers. He calls them "compounding machines," or the "three-legged stool" that he is looking for, which really leads them to some consistent growers, but not the most hyped stocks out there. So, it's a very distinctive strategy.

Benz: You mentioned that they'll sometimes hold cash.

Kinnel: Yes, that's right. They'll hold cash. When he started the fund a few years ago, he started off with a big cash pile and slowly whittled it down.

In a lot of ways, I feel like it's just a distinctive strategy you wouldn't see elsewhere, but executed very well. He's done very well here and at his previous fund.

We rate Akre Focus Silver. We recently raised it from Bronze to Silver. I think when you have boutiques, you get that laser-like focus. Here is the strategy, this is what everyone does, and I really like that.

Benz: They are not trying to be all things to all people.

Kinnel: Not even close.

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Benz: One of the things we sometimes see with smaller shops is that expenses can be a little bit high. How does this fund do from that standpoint?

Kinnel: Not great.

Benz: A little higher than what would be ideal.

Kinnel: Right. That's probably its weakest part. Expenses are not great. They've come down some, which is what led us to take it from Bronze to Silver. So it's a little more reasonable now. But I don't think they are ever going to be cheap.

You mentioned Vanguard and T. Rowe, and that's one of their clear advantages. They have the scale and the shareholder focus that enables them to bring lower costs. So there is definitely a tradeoff.

Benz: Another firm that you want to talk about is Wasatch. Most people know it for its focus on the small-cap space, but they have broadened out a little bit in recent years. Let's talk about what you think Wasatch does well and why an investor might consider looking at the shop's funds.

Kinnel: They are based in Salt Lake, and considering they only have about $10 billion under management, they actually have a fair number of analysts and managers and a fairly distinctive growth strategy--mostly focused on small caps.

They really look for earnings growth and earnings quality. What's interesting is they tend to often lag a bit in the rallies. Whereas, usually you think of favorite growth funds as ones that really make a killing in the rallies, their claim to fame was in the 2000-2002 bear market. They held up much better because they weren't chasing the dotcom hype. They wanted actual earnings, actual sales, that sort of thing. And you can see that this year a lot of their funds lagged in 2013 for some similar reasons. But then you look at the portfolio and see there is not a lot of hype there. There are a lot of good companies, and I feel comfortable owning those sort of names today after we've had huge rally.

Benz: I asked you to name one fund that you would recommend. You would probably recommend multiple funds from Wasatch. Let's talk about one fund within the shop that you really like.

Kinnel: Ultra Growth is a really good fund. It's got a nice mix of small caps. Again, while it owns growth, it's not the really high-priced growth. We've talked about how small caps and small growth in particular have had a big rally, and it's a little scary to own just about any growth fund these days, but along with Akre, I think it's one that I feel comfortable owning because it's not too high-priced. They're really owning good companies that are off the beaten path.

Benz: That kind of takes the edge off investing in small caps at this point after their big runup.

Kinnel: We hope.

Benz: Maybe dollar-cost averaging is a good idea at this point.

Kinnel: Yes.

Benz: Let's talk about another firm that I know you've long followed, and that's Tweedy, Browne. It's mainly a large-cap-oriented firm. Let's talk about what you think Tweedy gets right.

Kinnel: They've got longstanding ties with Warren Buffett, and you can see there's a lot of Warren Buffett influence there. They really look for great companies at reasonable prices, and you can see they're very much value investors who are very patient. Often, their strategy goes in and out of favor, but they really do well over the long haul.

We're moving into the second generation at that firm; many of the original generation are either retired or near retirement, but they've got some good investors coming along behind them, so we still believe in the firm.

Benz: You think there'll be some continuity in management even as the older guard retires?

Kinnel: Yes, I think they've done a really nice job of bringing up the next generation so that they really believe in the same strategy. And they've really got a global focus these days. They've long found a lot of good investments in Europe. I think they've really done a nice job with that.

Again, they're kind of hewed to the cautious side, particularly not paying too much but also getting good companies and solid businesses. They're not growth; they're much more of a value strategy, but I still like that conservatism and that emphasis on downside protection.

Benz: You say that Tweedy, Browne Global Value is probably the best expression of what the team at Tweedy does well. What do you mean by that?

Kinnel: Well, it's wide-ranging. Really, anything that looks cheap and attractive can go in there. They've got another fund with a greater emphasis on yield, but I feel like Global Value really reflects their emphasis mainly on Europe, but elsewhere too. I feel like a lot of their best names percolate up there.

Unlike Akre, they don't put huge weightings in their top names. It's a little more of a diffuse strategy, but very distinctive, very cautious, and you're talking about people who've owned the firm for much of their lives. They're not so interested in chasing performance to have a good single year and drive up assets. They're really looking out over the long term.

I think that's another great thing you get with boutiques is that long-term focus, that ability to block out the noise and to even not worry about whether they're at the top of the tables this year.

Benz: Well, thanks, Russ, for being here to provide these insights.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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