Give Small Fund Shops a Chance

A new year is approaching, and you know what that means: Time to make resolutions. Here's one idea that doesn't involve calorie counts or treadmills: Give more consideration to small shops and lesser-known funds than you may have in the past.

Not every small fund is notable. In many cases, an unheard-of fund deserves its anonymity. But plenty of worthwhile offerings are out there, with few assets and fewer distractions, just waiting to be discovered. Give them a shot.

The Challenge
Of course, some funds from the major complexes have earned their place in the sun. But that's not the only reason so many lesser-known firms are in the shadows. It's tough for investors to break through the deluge of advertising and media coverage that keeps big shops in the public eye. In addition, many investors have long and established relationships--both personal and technological--with one or a handful of large fund shops and thus feel that searching elsewhere for some minnow isn't worth the effort. The giants also can afford fleets of wholesalers to make regular contact with advisors.

The Internet can level the playing field to a certain extent. However, people still must know about a fund or fund shop, and have some interest, before they'll go to its Web site. The small firm's site might be as technologically sophisticated as one from the big boys and could well provide more useful information. But that won't matter if no one knows about it.

They're Out There
It can be difficult to learn about funds that don't come from the major complexes. That's one reason why we often write about funds and firms that are out of the limelight, hoping that some of you will investigate and keep these options in mind. A number of such columns have appeared on Morningstar.com this year. Interestingly, all of the funds discussed in the articles listed below are run by advisors based far from the major mutual fund capitals of New York, Boston, and Southern California. That might help explain why they've remained under the radar.

In August, we reviewed an impressive but little-known pair of equity funds run by a small family-owned advisory firm in North Carolina. Back in April we discussed another small fund from the same state, along with a tiny international small-cap fund from a Midwestern advisor. In October the destination was Minnesota, home of a worthy balanced fund whose long-tenured managers take full advantage of their knowledge of their region.

Why Bother?
Of course, it's not the case that funds from bigger shops can't succeed. If that were true, there wouldn't be so many funds from the major fund complexes on Morningstar's  Fund Analyst Picks lists. And you wouldn't see so many of the nominations for Morningstar's annual Fund Manager of the Year awards going to excellent long-term investors from large fund companies. But lesser-known firms, and funds, have advantages that make it worth the time to seek them out.

One is a smaller asset base itself. While many funds have continued to outperform as they've grown into midsize or even gigantic offerings, others have struggled under the weight of rapidly growing asset bases. Managers of big funds often concede--occasionally while they're running a big fund, but more frequently after they've left the huge conglomerate to start their own shop--that they were much more nimble when their funds were small. Big shops also tend to try to cover every niche of every asset class, with the results being many mediocre offerings. (It's nearly impossible to find enough topnotch managers and analysts to run 100 different funds covering multiple asset classes and innumerable categories.) A good small firm often focuses on one thing it does well, and just keeps doing it.

Although managers from little-known firms often do have to spend time trying to attract more investors, in general they face fewer distractions. They aren't asked to participate in firmwide marketing campaigns, aren't assigned to run new funds that the complex has decided to open up, and don't have to contend with frequent calls from media outlets. Again, many managers have succeeded even while coping with these extraneous factors. But it's comforting to know your manager doesn't even have to worry about them.

If those aren't compelling enough reasons to make the effort, how about this one? Some lesser-known funds have great managers. Many of the managers recognized as today's best investors were running funds that not too long ago would have been considered unknown or obscure.

What We Can Do, What You Can Do
We will continue to highlight funds and firms that deserve more attention. But we can't--and wouldn't--put your money into them. That part is up to you.

Moreover, you can find many of these funds on your own. When you come across an intriguing fund in one of your screens, or in a media report, don't ignore it just because the name is unfamiliar. Some investigation through Morningstar and on the fund's Web site might lead you to conclude that this obscure fund is worth serious thought. Sometimes you'll find that a small fund isn't from a tiny or untested firm at all, but rather from one that has a well-established reputation in the realm of institutional investing or private accounts.

Do you want an investment world where the only choices come from giant conglomerates? If not, keep the smaller fish in mind--and when you find a good one, invest in it.