Black Sheep Funds Offer Rewards--and Complications

"One-stop shopping" has been a rallying cry across the investment industry over the past couple of years, as brokerage houses, banks, and mutual fund shops scramble to attract investors. The mutual fund world's desire to be all things to all investors has birthed a peculiar kind of offering: the black sheep mutual fund. To keep up with the Joneses--or, more accurately, the Fidelitys and Vanguards--a smaller fund shop that has built its reputation around a certain style (aggressive, growth-oriented investing, for example) switches gears, hires a new management team, and diversifies its lineup with a fund that doesn't quite fit in with the rest of the family.

Many of these black sheep offerings have been nasty failures, illustrating the difficulties of venturing into unfamiliar investment territory. But quite a few have put up some nice numbers in recent years and their strong performances have attracted investors in droves.

Denver giant Janus introduced just such a black sheep fund at the beginning of 2001. The Janus funds are known for their aggressive portfolios, which made money hand over fist in the late 1990s. Janus managers and analysts generally look for fast-paced earnings growth and they're willing to make hefty sector bets in order to buy their well-researched favorites. This bravery caused trouble when global markets soured in 2000 and the funds suffered heavy losses.

In such an environment, the 2001 launch of Janus Global Value  received plenty of attention. Manager Jason Yee is an old Janus hand (he was an analyst at the firm between 1992 and 1996), but it's worth noting that he got some of his global-value training during a four-year stint at Bee & Associates, an institutional asset management firm. 

Yee looks for companies with sustainable competitive advantage, high operating margins, and strong free cash flows and he keeps an eye on firms with short-term difficulties that have dragged on their share price. Thus, in a shop known for rallying behind a few favorite stocks, Yee holds companies that few Janus funds would touch, such as Nippon Fire & Marine. 

This portfolio may look different from other Janus funds, but Yee isn't actually operating in a vacuum. In fact, he travels widely with other Janus managers, makes use of the shop's large pool of analysts, and takes part in the firm's mentoring process. So far, his process seems to be working: The fund doesn't have much of a record yet, but its performance in the last six months of 2001 easily outpaced its world-stock peers. Nicely-timed stock-picking also kept it ahead of most of its value-oriented rivals in the group.

Across town, the Berger family's black sheep funds are much more isolated from their siblings. Berger managers generally focus on companies with the strong potential revenue and earnings growth within their respective industries. The shop's hyperaggressiveness and willingness to brave sky-high valuations meant that many Berger funds got caught with hefty tech and telecom bets when markets plummeted in 2000. It wasn't just the downturn that hurt them, though. For the most part, the funds' longer-term records have been pretty disappointing.But the shop has a saving grace--two, in fact: Berger Mid Cap Value  and Berger Small Cap Value , both of which boast strong longer-term records.

The two funds might as well be a shop unto themselves. Both are subadvised by Perkins, Wolf, McDonnell and Company, which directs the day-to-day operations of the fund from Chicago and San Francisco.Managers Thomas Perkins and Robert Perkins look for companies with little or no debt, strong free cash flow, and low share prices relative to underlying asset value. That approach has worked nicely for them. The small-cap fund boasts a 15-year record in the top decile of the category. The mid-cap offering, while a bit more youthful, has gotten off to a strong start, and its three-year record through the end of 2001 looked better than 98% of its peers.

The higher-ups at Berger appear to have gotten the message loud and clear. Although the family's newest value offering, Berger Large Cap Value  isn't technically subadvised anymore (Berger announced the acquisition of the fund's San Francisco-based parent company, Bay Isle, on December 20), managers William Schaff and Steve Block remain independent from the rest of the Berger portfolio management team, running the portfolio from the coast.

The deep-value Gabelli shop's lone growth offering also sticks out. Howard Ward's Gabelli Growth Fund (GABGX) couldn't be more different from its siblings. While Mario Gabelli and his team of analysts load up on unloved sectors and lesser-known stocks, Ward sticks with just 45 big, blue-chip growth firms. He has never been afraid to load up on firms with big growth prospects, so the portfolio's stake in tech and wireless firms has been significantly larger than its rivals in the large-blend category. This aggressive tilt has made for troublesome performance lately, especially when compared with its Gabelli siblings, but the fund's longer-term record is still outstanding, thanks to strong returns throughout the past decade.

Finally, as a variation on the theme, there's Neal Miller's Fidelity New Millennium (FMILX). Miller is the only portfolio manager at Fidelity who didn't work his way through the firm's ranks, and it shows. Fidelity managers are devoted bottom-up stock-pickers and their analysts spend hours pouring over balance sheets and fundamentals. Meanwhile, Miller reads magazines and trade journals and makes his trades based on broad, top-down investing themes--such as "hurricane season" or our favorite, the new spring color palette. Fidelity gives Miller a lot of leeway here--he's allowed to close the fund rather than trying to put unwieldy assets to work and he makes huge sector commitments. Having this freedom pays off: Despite some volatility, the fund has one of the better long-term records out there.

These funds may look good, but investing here means investors have to be vigilant. The funds' maverick positioning and cowboy managers can make things difficult, especially in times of change.

For example, Ward has access to all of Gabelli's analysts, but he tends to work with a limited team, so there isn't a deep growth bench at Gabelli. That calls into question the future of the fund should Ward leave. Janus has successfully broadened its focus in the past--after all, its global funds have been strong performers--but the shop still concentrates on growth investing, so it's likely that Yee is solely responsible the fund's valuation discipline.Finally, it's clear that investors should head for the exits if Berger ever decides to bring those value funds in-house.