More Funds that Deserve a Second Chance

In a recent Fund Spy, we highlighted a few funds over which we once had doubts but are now more comfortable. We limited our article to just two fund companies, Janus and Morgan Stanley, because those stories had broader elements to them, but that's not always the case. In this follow-up Spy, we'll highlight some more funds that have changed our minds.

Before moving on, however, we'd like to address a comment from a reader who expressed concern that we advocated any fund from a fund family that was involved in the market-timing scandal. We certainly appreciate the reader's accurate assertion that fiduciary blunders make lasting impressions and that they shouldn't be taken lightly. We've worked closely with all of the shops that were involved, spending a good deal of time with upper management, which in many cases has changed, as well as the investment staffs and the boards of directors. In cases where our opinion on a fund company has grown more favorable, we're convinced that new procedures and personnel will protect investor interests.

 Berwyn 
This small-value fund ran hot and cold for years. We could see flashes of brilliance from manager Robert Killen as he sifted through the smallest of stocks, and we've always liked his strictly value-oriented stock-picking approach--looking for a margin of safety when it comes to micro-caps is a smart tactic. But Killen's tendency to load up on sectors added risk, produced a lot of volatility, and thus made it hard to figure out how to use the fund in a portfolio. In late 2001, however, Lee Grout joined Killen as a comanager. Grout's financial training nicely complemented Killen's statistics background, and the two made changes to portfolio construction. While they kept a concentrated portfolio in terms of stocks (roughly 40), they broadened out the sector exposure to increase diversification. After five years of exceptional returns, both on an absolute basis and relative to the competition, the fund suffered a dry spell in 2006, and we'd continue to expect some of that as micro-caps come in and out of favor. But we're much more comfortable with this offering now that Killen and Grout have several years of good results together. We also appreciate the team's willingness to close the fund when the asset base gets too unwieldy for a concentrated micro-cap strategy. The fund had previously closed when assets were close to $200 million. It's open now.

 Fidelity Small Cap Retirement (FSCRX)
As at too many funds at Fidelity, our reservations here stemmed from a manager change. In early 2006, experienced portfolio manager Jamie Harmon left this fund and its then-clone Fidelity Small Cap Independence (FDSCX) for the bigger  Fidelity Advisor Small Cap (FSCDX). New manager Charles Myers, who had been assigned as a comanager on  Fidelity Small Cap Growth (FCPGX) for 11 months, had limited experience as a portfolio manager. We liked his approach of keeping a more-concentrated portfolio--currently fewer than 50 stocks--and his pledge to keep turnover lower. (Turnover had previously run regularly above 200%.) We thought that such a strategy, frankly unusual at Fidelity, could showcase Fidelity's research talent and could also be sustained given the fund's small asset base. But we couldn't get past Myers' inexperience--at first. He's still new, of course, and performance so far hasn't been anything to write home about, so we advise those who have access to this retirement-oriented fund to take it slow here (particularly considering how well smaller stocks have fared in the past few years). But after a few more conversations with Myers, we're ready to recognize him as an up-and-comer at Fidelity. His stock-picking approach is reminiscent of Warren Buffett; we appreciate Myers' conviction, valuation sensitivity, and patience. The fund's small asset base is a further plus in the world of small caps.

 Sentinel Small Company (SAGWX)
We had always been a fan of former manager Scott Brayman, who ran this fund from late 1995 until September 2004. When he left to start his own firm and took several of the fund's analysts and a trader with him, we felt this fund had suffered a serious blow. Only one analyst who had specifically been assigned to this fund remained, Chuck Schwartz, and he was immediately named the fund's portfolio manager. With no experience as a mutual fund manager and little analytical support, though, we were worried. But Sentinel has done a good job of filling the gaps. Betsy Pecor rejoined this fund as an analyst after serving in that role on  Sentinel Mid Cap Growth  for several years, and she was promoted to comanager in June 2005. Two other analysts are currently working with Schwartz and Pecor. The two have kept Brayman's approach largely intact, and they've posted superior total returns during their two-plus-year tenure.

 Dreyfus Premier Core Bond 
Ever since Kent Wosepka and Marc Seidner took the management reins here in early 2005, we could point to improvement. The two had moderated the fund, better diversifying the portfolio and tempering the size of their bets, though they maintained the flexibility to invest in some riskier areas, such as high-yield debt and emerging markets. And while a manager change would normally make us leery (see above), Wosepka and Seidner had managed Dreyfus Premier Managed Income  for several years with aplomb. Still, we wouldn't endorse the fund because of its comparatively high expense ratio. Since then, a couple of things have happened. First, Seidner, and subsequently some of the fund's other investment personnel, have left Dreyfus. But we remain comfortable with Wosepka and new manager Catherine Powers, and we think the offering's remaining resources are sufficient. Second, Dreyfus instituted a fee waiver that brings the fund's expense ratio down to a much more competitive level. If expenses return to their previous, higher level, we won't hesitate to rake the fund over the coals. But at this point, the fund is a good option for bond investors.