These Young Funds Aren't a Gamble

Talented managers practicing prudent strategies are hard to come by. Ideally you'd find them in the early days before they're strapped down by billions in assets and a large number of clients. Yet, to get in on the ground level sometimes means taking a chance on an unproven manager or strategy and a business operation that's not yet fully viable.

That's not a risk many investors would or should take. Startup investment firms come through our offices frequently quoting admirable investment goals and trying to sell us on the hope that they, too, can achieve returns that will compete with the long-term results posted by such proven investment firms as Fairholme, Longleaf, and Davis. Few pan out.

Occasionally, though, a new fund comes along with built-in credibility. With such funds, you're not taking a shot in the dark--even when they're young. These are the startups run by seasoned, proven managers who've already achieved success elsewhere. Managers you'd allocate capital to from day one.

Many of the best asset managers started off that way. Primecap was founded by a group of individuals who left Capital Group (the advisor to American Funds), and Tom Marsico broke off from Janus and hung his own shingle in the mid-to-late-1990s. Unfortunately, not all talented managers pull it off. In March, Kevin O'Boyle closed down his firm and 5-star fund, Presidio, returning assets to fund shareholders after five years and having attracted less than $100 million in assets.

We think the following well-known managers of young funds have a good shot at success in creating their own strong investment operation and a shareholder experience that will stand the test of time.

Jeffrey Gundlach
Prior Funds: TCW Total Return Bond  (TGLMX) and TCW Core Fixed-Income (TGCFX)
New Funds: DoubleLine Total Return Bond  (DBLTX) and DoubleLine Core Fixed Income (DBLFX)

The most closely watched new fund company is DoubleLine, run by ex-TCW manager Jeffrey Gundlach. Gundlach generated total returns during his 16-year tenure leading bond portfolios at TCW that were best in class. Setting aside the dramatic circumstances of his parting with TCW, Gundlach is a skilled hand at bond investing and has quickly put together a well-resourced investment operation equipped to run billions in fixed-income assets. He knows mortgage-backed bonds well and has shown flexibility in his mandate since starting up shop, scooping up some lower-rated non-agency-backed mortgages, which didn't play as meaningful a role at his prior charge. Gundlach's new funds are available at roughly the same cost as the TCW funds he used to manage.

Charles de Vaulx
Prior Funds: First Eagle Global (SGENX) and  First Eagle Overseas (SGOVX)
New Funds: IVA Worldwide  and  IVA International 

Charles de Vaulx is practicing the same kind of value-oriented approach he contributed to First Eagle. The new IVA funds have been around for almost two years and already have attracted roughly $6 billion in assets, allaying any concerns that the firm will not be viable. De Vaulx and comanager Charles de Lardemelle maintain a steadfast view of risk, which is oriented around avoiding the permanent loss of capital, not simply losing less than a benchmark. To achieve that, de Vaulx mixes stocks, bonds, gold, cash, and options for a portfolio with an attractive risk/return profile. The portfolios currently have more than a fourth of assets in Japan, where cheap valuations and a healthy export business into China have helped de Vaulx see past two decades of economic stagnation and the country's history of deficient corporate governance.

Chuck Akre
Prior Fund: FBR Focus (FBRVX)
New Fund: Akre Focus (AKREX)

Chuck Akre had a successful 12-year stint running FBR Focus before breaking off and starting this fund in late 2009. Akre is practicing the same flavor of investing we've come to know from him. Valuations play a central role, and he thinks about absolute returns and risk, not relative ones. He's selective about management teams and won't invest with corporate executives he doesn't believe in and trust. He launched the fund at the exact same price as his prior charge. He's taken his time investing the portfolio, waiting to put more money to work as the market fluctuated rather than filling the portfolio all at once when he launched in the midst of a broad market rally. By the end of April 2010--a full eight months after launching--the fund held 20 stocks and still had nearly 40% of assets in cash. That served shareholders well as the market stumbled in 2010. The fund has managed to make a little money this year; its early returns look better than rival funds and the broad stock market.