Fund Times: Another Round of Small-Cap Fund Openings

As small caps continue to cool off in the current environment, a smattering of closed funds that traffic in small and midsized companies have swung their doors open.  Pioneer Oak Ridge Small Cap Growth (ORIGX), run by David Klaskin, cofounder and chief investment officer of subadvisor Oak Ridge Investments, is among the latest to accept new investors. Klaskin's low-turnover, value-conscious style may be less aggressive than some growth managers', but it's kept volatility muted relative to racier peers and offered reasonable downside protection. Pioneer initially closed this offering to new investors when assets reached $225 million in late May 2005, and they remain near that level today.

After experiencing substantial outflows--roughly $4 billion over the past two years-- Lord Abbett Mid-Cap Value (LAVLX) has also reopened. Poor relative returns in recent years have likely spurred on the outflows, but we think the fund is worthwhile. It still boasts a solid long-term record and a skillful, seasoned manager in Ed von der Linde. The fund first closed in September 2003, following a period of rapid expansion.

Wasatch Advisors has also recently reopened a quartet of funds focused on smaller companies: small-growth funds  Wasatch Ultra Growth (WAMCX) and  Small Cap Growth (WAAEX), as well as  Wasatch Core Growth (WGROX) and small-blend  Wasatch Small Cap Value (WMCVX). Wasatch is a highly regarded small-cap research group, so these funds have a strong research backbone behind them. We're also encouraged Wasatch has shown commitment to fundholders by closing funds in the past at reasonable levels.

 Delaware Small Cap Value (DEVLX) has also reopened, but we're a bit skeptical about this move. Although it has seen net redemptions in recent months, lead manager Christopher Beck is still running roughly $1.9 billion in this strategy (down from $2.5 billion as of Nov. 30, 2006), and the fund's profile has tilted toward larger companies in recent years as a result. Given its penchant for larger names, the fund may not be suitable for investors seeking pure small-cap exposure. Other recent fund openings we'd think twice before buying include  Dreyfus Midcap Value (DMCVX) and  Franklin Small Cap Growth (FSGRX).

TCW Out at Masters' Select Funds
Litman/Gregory, advisor to Masters' Select funds, has removed Los Angeles-based TCW as a subadvisor on two of their funds. The team of Steve Burlingame and Craig Blum, who also ran large-growth offering  TCW Select Equities (TGCEX), had run 20% of  Masters' Select Equity (MSEFX), a Morningstar Fund Analyst Pick in the large-blend category, and a third of Masters' Select Focused Opportunities . Litman/Gregory made this decision after Burlingame's unexpected departure from TCW in February, which left Blum in sole charge of the TCW strategy. The advisor became concerned about the TCW team's stability when Burlingame's resignation marked the third in a string of significant departures since they were first hired in October 2003.

In place of the TCW team, teams from subadvisors Sands Capital Management (Frank Sands, Jr. and Michael Sramek) and Turner Investment Partners (Bob Turner, Chris McHugh, and Bill McVail) now each run 10% of Select Equity. Sands Capital alone has taken over TCW's duties on the smaller Focused Opportunities. Sands' bottom-up investment process favors established, steady growers trading at reasonable prices, while Turner's approach, which combines quantitative, fundamental and technical analysis, is riskier. Litman/Gregory displayed sound judgment in selecting subadvisors in the past, so we're not terribly concerned about this change. Turner has also built an impressive and lengthy record running  Vanguard Growth Equity , a large-growth Analyst Pick.

Fidelity Joins the Long/Short Field
This week, Fidelity entered the growing field of so-called long/short funds with the launch of Fidelity 130/30 Large Cap . Keith Quinton, who has managed  Fidelity Tax-Managed Stock  since February 2004 and  Fidelity Disciplined Equity (FDEQX) since October 2006, calls the shots at the new fund. He aims to keep 130% of the fund's assets in traditional "long" positions that he expects will appreciate in price and 30% of assets in "short" positions designed to benefit from underperforming stocks. An expense cap brings the fund's price tag down to 1.30% of assets per year, which is pricey relative to other no-load funds that invest in large companies.

Despite a growing retail interest in alternative strategies like long/short, we're not convinced that these funds are a must-have for investors. In this year's downmarket, where a fund could potentially benefit from short-selling stocks, these funds haven't necessarily demonstrated an edge. The S&P 500 shed roughly 7% for the year through April 9, and the typical long/short fund has fared slightly worse. Of course, it's difficult to form any meaningful conclusions over such a short time period, but we think many of these funds still have something to prove.

SSgA Closes a Disappointing Chapter
State Street Global Advisors has taken steps to close and liquidate their beleaguered ultrashort bond fund,  SSgA Yield Plus . When the credit crisis first began wreaking havoc on the market last summer, this fund was stung by a sizable bet on nongovernment mortgage-backed and asset-backed bonds exposed to subprime mortgages. Although the majority of those assets had originally carried investment-grade ratings, their value quickly eroded in mid-2007 as investors shied away from subprime-mortgage-related securities of all stripes. This isn't the only ultrashort bond fund to take it on the chin, but the fund's staggering 30% loss for the 12 months ending April 10 is the worst showing in the category, although the larger  Schwab YieldPlus  isn't far behind.

The fund's board approved a plan to liquidate the fund by the end of May, although shareholders have been effectively liquidating the fund since trouble first hit last year by pulling their money out in droves. The fund's net assets have dropped to a meager $26 million, down from $207 million in June 2007.

Etc.
At mid-blend Analyst Pick  Osterweis Fund  (OSTFX), comanager and financial stocks analyst Mike Hughes has resigned to pursue other options. This change isn't too disconcerting, as Osterweis still has an experienced, five-member investment team, and former comanager Nick Graves will return from semi-retirement to fill any holes until a suitable replacement is located. It's worth keeping an eye on the fund, though, to see if any further changes may be in store.

Tim Keefe, former lead manager on  JHancock Large Cap Equity (TAGRX) has left the fund. Keefe had also served as chief equity officer for the fund's advisor MFC Global Investment Management, but he's left the firm to pursue an opportunity with hedge fund Mayo Capital Partners. The fund's comanagers Tim Malloy and Roger Hamilton will continue to steer the fund. This isn't the first time Keefe has left the fund. After steering it capably from 1996 until 2000, he departed for a stint at Thomas Weisel Partners, only to return to the fund in late 2004.

Affiliated Managers Group's planned purchase of a majority equity stake in value boutique Cooke & Bieler has fallen through. According to a recent filing, C&B and AMG have mutually decided not to dissolve the October 2007 acquisition agreement in light of recent volatility in the financial markets. C&B subadvises Wells Fargo Advantage C&B Large Cap Value (CBEAX) and  Wells Fargo Advantage C&B Mid Cap Value . For shareholders in the funds, we expect business as usual. Cooke & Bieler has been independent since management bought back its shares from Old Mutual in 2001, and it appears it will remain so for now.

Vanguard announced that they will hold a subscription period in anticipation of the launch of their anticipated trio of Managed Payout Funds. The firm will accept subscriptions from April 21 through May 4, which will be held in money market instruments until a complete portfolio can be constructed on May 5.