The Nine Best New Funds of 2010

Most new funds are trendy or poorly managed. To make matters worse, many start with a big price tag that suggests one should pay a premium for less-proven investments. Yet every class has a few keepers. Searching through this year's new funds, I found nine promising ones. While the funds are new, the managers are experienced investors with strong track records at other funds. Thus, you aren't gambling on an unknown. On the downside, because they are new, some of these funds have less-than-great expense ratios, so you'd be buying in hopes that asset growth would drive costs down.

We haven't made any of them Analyst Picks, but certainly some make good investments today. Others have more to prove but are worth watching. I'll run through the nine with those that seem most ready for investment from the start.

 DoubleLine Total Return Bond DBLTX
Expense Ratio: 0.49%
Manager: Jeffrey Gundlach
In 2009, Jeffrey Gundlach produced great performance at  TCW Total Return Bond (TGLMX), but he was fired in December. Gundlach launched his own firm and resumed his strategy at this fund in April, and he has continued his remarkable stretch of uncanny returns. In between, he sparred with TCW in a painful divorce that must have scared away potential investors from both firms. There's no doubting Gundlach's skill, but if TCW's charges are true, you'd be taking a risk that he has a flawed management style that one day might harm performance. That risk is tough to define, though, and performance remains stellar. Recently, DoubleLine revealed that, as part of an investigation into the Public-Private Investment Program for Legacy Assets, the U.S. attorney has also asked for information relating to TCW's allegations that Gundlach and other former employees stole proprietary secrets. On the plus side, it might well never be a problem for shareholders.

 PIMCO EqS Pathfinder  
Expense Ratio: 1.24%
Managers: Anne Gudefin and Charles Lahr
It's great to see the Mutual Series style available in no-load format once more. Anne Gudefin and Charles Lahr did excellent work at Mutual Series, and they ought to do well here. They've started to build up a small analyst staff to help them, and they also are tapping PIMCO's macroeconomic expertise to give them a leg up. Lahr said PIMCO helped keep him from jumping into Greek equities too soon when a debt panic threw the country into crisis. Their cautious approach is welcome in this time of turmoil, but their moves into cash mean they aren't likely to get a big pop when stocks rally.

 Vanguard Explorer Value  (VEVFX)
Expense Ratio: 0.59%
Managers: Thomas Duncan, William Teichner, Amy Minella, Eugene Fox, Robert Kirkpatrick, Eduardo Brea, and Brian Walton
Because  Vanguard Explorer (VEXPX) has a mild growth tilt, Vanguard rolled out a small-cap fund with a value tilt. This fund has the Russell 2500 Value Index as its benchmark. That means small- and mid-cap stocks in the value and blend boxes are fair game, and so far the portfolio seems pretty evenly spread across the lower half of the Morningstar Style Box. The fund is split among three subadvisors: Frontier, Cardinal, and Sterling Capital Management. The only relevant track records are Sterling's at BB&T Mid Cap Value (OVEAX) and Cardinal's at Brown Cardinal Small Companies . Both funds have modestly outperformed their benchmarks under current management.

All three subadvisors ply relative value strategies that emphasize strong cash flow, low valuations, and solid management. As you might expect from three subadvisors, the fund has a diverse portfolio of 175 stocks, none of which accounts for more than 2% of the fund's assets. The two things that stand out about the portfolio are that it is purely invested in the United States, and it has a significant REIT weighting.

 Evermore Global Value  (EVGBX)
Load: 5%
Expense Ratio: 1.6%
Manager: David Marcus
A decade ago, David Marcus was running funds for Mutual Series. Then he left to run a hedge fund and subsequently ran businesses and invested on behalf of a wealthy Swedish family. His investment style has changed a little, emphasizing the quality of management more than is traditional for Mutual Series investors. It's a promising fund, but Evermore needs to lower expenses here before I'll be enticed.

 Fairholme Focused Income  (FOCIX)
Expense Ratio: 0.50%
Manager: Bruce Berkowitz
I have a fair amount of faith in Bruce Berkowitz's judgment, but we're still figuring out exactly what kind of fund this is. So far, it looks like a pretty conservative corporate-bond fund with a lot of short-term debt that Morningstar classifies as cash. So I'd keep it as a small part of my portfolio, and I'd own a high-yield or true multisector fund for the more adventurous part of my bond portfolio. I should also note that the expense ratio is something of a teaser rate and could rise to 1.00% if a fee waiver is allowed to expire. It's set up for annual renewal.

Berkowitz has also filed for an asset-allocation fund, which will launch in 2011. I'm a little more intrigued by that one because it may be that Berkowitz will invest in smaller companies than he can tap for the hefty  Fairholme Fund (FAIRX).

Jensen Value  (JNVSX)
Expense Ratio: 1.25%
Managers: Kurt Havnaer, Robert McIver, Robert Millen, Eric Schoenstein, and Robert Zagunis
Jensen has built a strong record investing in high-quality growth, but now it is venturing into value territory. Success in one realm doesn't necessarily translate into another, so it has some proving to do. However, it is trying to make this a value version of its growth strategy. It starts with quantitative models of quality companies with a 15% return on equity for 10 consecutive years and then focuses on those with the lowest valuations.

Jensen Value's first portfolio makes the fund look like a modest departure from  Jensen Fund  (JENSX). It is spread across value and blend, mid-cap and large cap, while the original Jensen hugs the line between blend and growth. Jensen Value's portfolio has more than 50 stocks, compared with 28 in Jensen. In addition, Value has a larger cash stake, though that may just reflect a gradual process of investing the portfolio. All told, there are five stocks that made it into both portfolios:  United Technologies (UTX),  Omnicom (OMC),  C.R. Bard ,  Equifax (EFX), and  Sysco Corporation (SYY). In each case, Jensen Fund had a greater weighting in the stock than did Jensen Value.

Hartford International Value (HILAX)
Load: 5.5%
Expense Ratio: 1.40%
Manager: Theodore Jayne
Hartford puts its Wellington relationship to good use with this new fund. Theodore Jayne has been with Wellington since 1998, and, as with any Wellington fund, he will tap into the work of the firm's skilled analysts. Wellington's foreign-value strategies have mostly been under wraps, so it's hard to say how they'll do here, but the foreign large-blend Hartford International Opportunities (IHOAX) has top-third returns over the trailing three-, five-, and 10-year periods.

Artisan Global Equity  (ARTHX)
Expense Ratio: 1.50%
Managers: Barry Dargan and Mark Yockey
Mark Yockey has a good long-term record but middling recent performance at  Artisan International (ARTIX). He is teaming with MFS veteran Barry Dargan to run a global stock portfolio. Dargan's background also is in foreign equities, so the U.S. side may be new ground for all. Otherwise, the strategy seems similar to the one Yockey runs at Artisan International: Look for secular growth stories trading at decent prices. In fact, the two funds have 15 stocks in common, so don't buy it if you already own Artisan International.

AQR Risk Parity Fund (AQRIX)
Expense Ratio: 1.2%
Managers: John Liew, Brian Hurst, Michael Mendelson, and Yao Hua Ooi
This one has a steep minimum if you don't invest through an advisor, so do-it-yourselfers should skip ahead to the next paragraph. The idea of risk parity is to keep four risks roughly equal: equity, interest rate, inflation, and credit. Because stocks generally are more volatile than bonds, they leverage up the bond side, so there is risk parity. The really clever bit is that they adjust exposure to asset classes based on volatility in the market. So, as volatility rises, they will reduce the weighting. Because some bear markets for bonds and stocks feature heightened volatility, it can significantly reduce losses. This strategy worked beautifully in 2008, but it would not have been much help in a sudden freefall, such as October 1987. It's hard to get too excited about leveraging up bond exposure given low yields, but they point out it's easier to predict volatility than returns.

For do-it-yourselfers, Managers AMG FQ Global Essentials fund  runs a risk-parity strategy that is similar to but not identical to the AQR fund. It has a a $2,000 minimum and a 1.54% expense ratio.

This article originally appeared in Morningstar FundInvestor.

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