Three Funds That Could Be Tomorrow's Comeback Kids

Managers like David Williams of  Columbia Value & Restructuring  and John Keeley of  Keeley Small Cap Value  long have prospered finding hidden opportunities among corporate turnarounds and overhauls. Investors also can find overlooked funds among those undergoing management and/or strategy shifts.

Earlier this year my colleague, director of mutual fund research Russel Kinnel, highlighted some funds that are far enough into their turnarounds to declare the coast is clear. Their managers and strategies have been in place for three to five years or more and have made clear breaks with their funds' desultory longer-term pasts. A new day has dawned for funds such as  Harbor International Growth (HAIGX) and  Morgan Stanley Mid Cap Growth .

There's always another batch of comeback kids, though. Looking out for the next generation can help one locate funds with smaller, more flexible asset bases; managers with something to prove and lots of unrealized losses that could lead to years of tax efficiency. One way to find future most-improved players is to look for funds with lousy long-term track records that have recently been taken over by managers who have amassed experience and success elsewhere. Here are some candidates that still have to prove themselves but are worth watching.

 Oppenheimer Main Street (MSIGX)
Mani Govil, who took over this fund almost a year ago, has turned funds around before. He improved the performance of  RS Large Cap Alpha (GPAFX) from August 2005 to March 2009. Govil and comanager Ben Ram have had mixed success thus far. The fund's nearly 30% annualized gain from Govil and Ram's May 19, 2009, start through April 6, 2010, is impressive in absolute terms but lags both the S&P 500 Index and large-blend category by a few percentage points. The performance is consistent with Govil and Ram's approach, though. They use both quant screens and fundamental analysis to find stocks with competitive advantages that aren't fully reflected in their valuations and that offer limited downside. This process helped RS Large Cap Alpha lose less than its peers and index during Govil's tenure. That bodes well for this fund.

 Vanguard Growth Equity 
Vanguard retooled this fund's management at an inopportune time, but the changes could make it steadier in the future. It dumped longtime subadvisor Turner Investment Partners and its momentum-chasing style just before the market started to favor such aggressive philosophies. Nevertheless, new subadvisors Kathleen McCarragher of Jennison Associates and Mick Brewis of Baillie Gifford are seasoned and qualified managers whose more-moderate methods are capable of producing decent returns over the long term. They both stress bottom-up stock analysis and gravitate toward less-speculative, financially sound growth businesses endowed with competitive advantages. So, the fund will no longer go to the extremes it used to but will be easier to own.

Dean Small Cap Value (DASCX)
Dean Small Cap Value is a tiny fund that has a crummy long-term record. You can't blame the current managers. The longest-tenured member of the team has only been around since October 2006, and other two joined in June 2008. The fund has been more competitive since the new squad came together. More interesting is that managers Steven Roth, Kevin Laub, and Douglas Leach are former members of the team running  American Century Small Cap Value (ASVIX), which posted strong absolute and relative returns during their tenures. It's not clear if the fund can replicate that success (from June 30, 2008, through April 6, 2010, this fund posted a strong 7.5% annualized return but still lagged the American Century fund's 12.6% gain). The managers, however, are plying a similar process, buying stocks that appear cheap on a variety of measures and quickly selling them when they surpass their fair-value estimates, with a smaller asset base and more-focused portfolio. The fund's fees are above median, but it has less than $20 million in assets and expenses could fall as assets rise.

It's too early to declare these funds fully revived. It would help their cases if the managers had more money in the funds than they currently do. None of them had more than $500,000 on the line as of the most recent disclosures, and some have none. These funds are worthy of a spot on your watchlists, though.