Four Overlooked Gems from the Crossroads of the Style Box

The following column first appeared in Morningstar FundInvestor's January 2007 issue. For information on subscribing, click here.

At the crossroads of the Morningstar Style Box, mid-blend encompasses a wide range of portfolios and strategies. Some are all-cap-focused funds; others are pure mid-cap plays but hold lots of value and growth. Managers (and Buffett fans) at  Fairholme  (FAIRX) and  Selected Special Shares (SLSDX) are represented alongside computer-run quant funds such as  Vanguard Strategic Equity (VSEQX) and go-anywhere thematic investors such as  CGM Focus . This diversity means some good funds will always have deceptively poor performance just because they are so different from the category in aggregate. With that in mind, here are four excellent mid-blend funds you might easily overlook.

Ariel Appreciation
 Ariel Appreciation (CAAPX) has faced two types of headwinds lately. First, it has a sizable chunk in large caps, as its $9.3 billion average market cap demonstrates. Although large caps were okay in 2006, they've been crushed by mid- and small caps over the past five years.

Second, John Rogers' strategy is a conservative one that looks great in down years but can be sluggish in strong rallies like the one we've enjoyed lately. Rogers looks for steady companies trading at steep discounts to his estimates. That can lead him to some rather sleepy companies that plod along and then get bought out at a nice premium. Although performance has dipped, all the fundamentals are still there. We were also pleased to see that Rogers recently named Matt Sauer, former comanager at  Oak Value Fund , to be comanager here.

FAM Value
 FAM Value (FAMVX) is also lagging because of its caution. John Fox and Thomas Putnam look for companies with healthy balance sheets and strong cash flows, but they prefer not to pay up for a stock. That's left the fund out of some hot areas like energy; as a result, the fund has lagged. In terms of market cap, the fund is a nearly pure mid-cap play, although its holdings do stretch from the value side of the style box to the growth side. We visited the managers in their Cobleskill, N.Y., offices and were impressed by their commitment to shareholders, stability of investment professionals, and long-term focus. The fund rates an A for stewardship and still has solid returns for the trailing 10- and 15-year periods. We expect a rebound in more favorable environments.

Westport Select Cap
Like FAM,  Westport Select Cap  is run by a small but stable group of managers. Ed Nicklin and Andy Knuth employ a low-turnover, growth-at-a-reasonable-price strategy. They straddle the line between small cap and mid-cap and between blend and growth. It's that growth bias that has held back returns in a value-dominated decade. Even so, the fund is well ahead of its peer group since its inception on the last day of 1997. Despite the fund's growth bias, Nicklin and Knuth keep risk in check by keeping a close eye on industry diversification. If you hold this fund, consider it a keeper. If you don't, then consider  Westport Fund , which is similar but lacks the small caps held by Select Cap.

Selected Special Shares
 Selected Special Shares (SLSDX) is a great fund, but you can't tell that from its record. Run by Selected's outstanding corps of analysts, the fund has been hurt by a growth bias and a sizable slug of large caps. Even so, I love the fact that this fund has a tiny asset base, reasonable costs, great stewardship, and excellent analysts. If you don't have any mid-cap funds, this would serve as a nice, single, mid-cap play. I wouldn't pair it with a mid-growth fund, however, because of its growth tilt.