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Fund Spy

Topnotch Funds That Defy the Odds

Some successful managers don't subscribe to conventional investing wisdom.

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In general, we like funds that exhibit certain traits that we've found more likely to provide success over the long term. For example, we tend to favor managers with low turnover--meaning they stick with their companies for years rather than trying to guess next quarter's trends--and who have the guts to put a meaningful portion of fund assets into a relatively moderate number of picks.

However, these and similar points are intended to serve as guidelines, not rigid rules. As it turns out, some outstanding managers disdain these habits--yet their long-term performance shows they know what they're doing. The following managers are not the only ones triumphing by taking approaches that typically lead to mediocrity, but they provide fine examples.

Frank Jennings, Oppenheimer Global Opportunities (OPGIX)
We tend to shy away from equity-fund managers who try to beat the competition by relying in part or in whole on their opinion about the overall level of the market. Even the smartest managers and market strategists--and economics professors and central bankers, for that matter--seem to misfire with such estimates at least as often as they hit the mark. Top-flight fund managers have a much better track record identifying specific companies that are in position to prosper yet are trading at bargain prices.

But Frank Jennings begs to differ. Although he certainly does intensive fundamental analysis of individual firms, he also bases some investment decisions partly on his views of overall market levels as well as considerations of macroeconomic conditions in regions and particular countries. Most managers who end up with large cash stakes take great care in telling us that they're not making a market call--they just can't find enough individual companies that meet their rigid standards at the right price. Not Jennings.

Although his record on such calls isn't perfect--how could it be?--it has worked often enough. Along with his stock-picking, some timely moves into bonds or cash and the occasional currency hedge have given the fund the second-best 10-year record in the world-stock category.

Rudolph-Riad Younes and Richard Pell, Julius Baer International Equity (BJBIX),  Julius Baer International Equity II (JETAX),  Heritage International Equity (HEIAX), and  ING Foreign (IAFAX)

Rudolph-Riad Younes and Richard Pell tend to use much more macro-level analysis than other top managers. Their macro views are more about big-picture growth trends and the like rather than stock-market calls, and such views tend to affect their sector preferences rather than influencing them to move heavily into cash or bonds. Even so, it was in character when a few years ago they were vocal about the S&P 500 Index being sharply overvalued.

What's even more noteworthy, though, is the size of their portfolios--and their unwillingness to make a strong commitment to any particular stock. Julius Baer International Equity currently has more than 500 holdings, and it's rare to see any company get much more than 2% of assets: The top pick in the current portfolio has just 1.7%. Usually, that's the sign of managers who are inadvertently watering down a portfolio with scores of holdings that don't really excite them, simply out of fear of lagging the index by an amount that could draw unwelcome attention.

It would be laughable, though, to say Younes and Pell are trying to mimic an index or are afraid of being different. Their portfolios look like no others. And their performance is just as singular--they've been trouncing rivals and indexes for more than a decade, with returns fueled by prescient regional and thematic plays commonly made years ahead of the competition.

Fergus Shiel, Fidelity Capital Appreciation (FDCAX)
Outside of the small momentum-fund crowd, technical analysis is another habit top managers typically disdain. That's the practice of trying to predict a stock's future not by analyzing the company's financial situation and business prospects, but by how its stock price has behaved. The chart reveals all.

Fergus Shiel doesn't sneer at charting. He says point-blank that fundamental analysis isn't the be-all and end-all. That may sound especially surprising coming from a Fidelity manager, where fundamental analysis is the focus of literally hundreds of research analysts--the largest such army in the mutual fund world. And Shiel certainly does his share of conventional research. But whatever Shiel is using those price charts for, it seems to work. His record on Fidelity Capital Appreciation, his current fund, is short but strong, and over a long tenure at  Fidelity Independence (FDFFX) he far outpaced his benchmark and his competition.

Peter Lynch, formerly Fidelity Magellan (FMAGX)
On second thought, maybe it shouldn't be surprising to see a Fidelity manager succeeding by breaking the rules followed by most great investors. For one thing, Fidelity actually has a group of specialists focusing on technical analysis. Moreover, as Morningstar managing director Don Phillips wrote in 1993, one way the legendary Peter Lynch racked up his fabulous long-term record at Fidelity Magellan was by following a number of practices that trip up managers nine times out of 10.

Like the Julius Baer duo, for example, Lynch owned a sprawling portfolio rather than concentrating on relatively few high-conviction names. He also eschewed the low-turnover strategy; in the late 1970s and early 1980s, the fund's turnover rates under Lynch ran to more than 200% per year. Even when he calmed down later in the 1980s, the fund had turnover of about 100% every year. And it all worked wonderfully.

More Than One Way to Win
Don't throw out the guidebook. There's good reason to favor low-expense, low-turnover strategies--our studies of fund performance over long periods show that such practices do produce better results much more often than not. Other standards--looking for long-tenured managers, for instance--also have been shown to stack the odds in your favor. But resist the temptation to avoid every fund that doesn't meet those guidelines. There's no law that says other methods must fail. On occasion, unorthodox funds can be among the best. 

Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.