Marsico or Marsico Focus? Oakmark or Oakmark Select?

One of the most frequent questions I get from investors is how to decide between two funds that are run by the same manager. The answer is obvious when the funds' strategies are far enough apart. For instance, while Mason Hawkins and Staley Cates are named as managers on  Longleaf Partners (LLPFX),  Longleaf Partners Small-Cap (LLSCX), and  Longleaf Partners International (LLINX), the funds are significantly different from each other, so it doesn't have to be an either/or decision. In fact, owning all three would result in minimal overlap and a well-diversified value portfolio.

But what do you do when you're confronted with choosing between, say,  Oakmark (OAKMX) and  Oakmark Select (OAKLX) or  Marsico Growth (MGRIX) and  Marsico Focus (MFOCX)? In both cases, the managers employ similar strategies on their funds and have been successful in executing at both charges. And that's no surprise given that there's often significant overlap in the portfolios. In fact, the most notable difference in cases like these is that one fund is a more concentrated take on the manager's philosophy.

Take a Good Look at the Manager and More
So, to pick between the two, investors have to consider a couple of simple things, but they're worth reiterating here. First, to lean toward a concentrated fund, make sure you've got a heck of a manager at the wheel. His or her stock-picking skills are key because focused funds really tend to be their managers' "babies." (In fact, my guess is that as we see more filings showing managers' investments in their funds, many will be more heavily invested in their concentrated funds.) Too many concentrated funds have failed because they've exposed a lack of talent at the managerial level in a manner that a diversified portfolio might not. Just look at Ameritor Investment  if you don't believe me.

And because we're talking about the importance of the manager at a focused fund, it's a must to consider manager risk. That is, how convinced are you that the person running the fund is committed to sticking around? If the manager were to leave, the transition is likely to be more jarring than at a diversified offering. After all, any new person is likely to put his or her stamp on a concentrated portfolio in a fairly dramatic fashion. In fact, look for stability at the fund company level as well. When concentrated funds hit rough patches--and they will--a fund company has to be able to withstand pressure to immediately bring changes. Simply put, there's nothing worse than changing course just because of short-term performance volatility.

Finally, be sure to evaluate the fund's risk/reward profile by evaluating the downside. It's just too easy to focus on the upside, especially because a handful of the most prominent concentrated funds have posted significantly better long-term returns than their more-diversified siblings, even though the funds ostensibly use the same strategy. Look at  ICAP Equity  and  ICAP Select Equity , for instance. The former has lagged the latter by more than 2 percentage points annually for the trailing five-year period.

But it's especially important that you evaluate this downside in the context of your own appetite for volatility. We've found that investors come out ahead when using funds that are less volatile because they are more likely to stick with them through rough patches. And you can assume that focused offerings will be more volatile and require more patience than broadly diversified rivals. Take  Janus Twenty , for instance. Its absolute annual returns have been volatile, and many investors were probably tested when the fund dropped 32%, 29%, and 24% in three consecutive years. Moreover, there's a good chance that when a particular style is out of favor, the concentrated fund is likely to do much worse. In fact, that's what has happened with the two Marsico funds in what has been a terrible market for large-growth investors. Heck, even Oakmark Select had some outflows last year, mostly because it hit a short-term performance bump. That's to be expected of a concentrated fund (or most any fund, for that matter), and investors simply need to recognize that going in.

When Everything Looks Good
All told, however, it's pretty clear to me that if you've got a talented manager, stability at the fund company level, and the willingness to ride out periods of performance volatility, the balance tips in favor of the concentrated choice you're looking at. Favoring funds such as Oakmark Select, Marsico Focus, and ICAP Select Equity over their siblings seems like a good idea to me. My guess is that they will win over the long run.

And be sure to look beyond the funds' names alone. Consider Clipper/Clipper Focus, for instance. The former carries cash and/or bonds when the managers are having a tough time finding stocks they like, while the latter always keeps at least 95% of its assets in stocks. While  Clipper Fund's (CFIMX) significantly lower expense ratio is reason enough for me to favor it over  Clipper Focus , there are other things that also work in its favor. In particular, I feel like it's an unadulterated way to get access to the managers' strategy--while holding cash may not be something everyone likes, it's a key component of the fund's capital preservation strategy, and in such situations I'm inclined to go with what the managers' true intent is/was. That's even though the Focus offering has built a stronger record since its inception.

News from Amerindo

In a recent filing, Amerindo Funds revealed: "The prior investment advisory agreement and expense limitation agreement between the Fund and the Advisor terminated on May 31, 2005. Under the terms of the Fund's new investment advisory agreement, the Fund will pay an annual advisory fee, equal to 1.00% of the Fund's average daily net assets. As a result of the extraordinary expenses incurred by the Fund in connection with the matters involving Messrs. Tanaka and Vilar, the Fund's expense ratio is anticipated to increase to approximately 5.00% to 7.00%. It should also be noted that the Fund has experienced shareholder redemptions of approximately 49% since these events transpired."

Why the Amerindo board doesn't simply liquidate the fund rather than leveling investors with such astronomic fees is beyond us.