Funds That Aren't Afraid to Show Their Independence

The Fourth of July conjures up images of fireworks, parades, the stars and stripes, and other symbols that help remind us of how fortunate we are to live in a great country like the United States. As investors, we have special reason to be thankful that we live in a country where anyone can participate in the stock market in the hope of achieving their own personal version of the American Dream, whether it be retiring comfortably, purchasing a home, sending the kids to college, or even just buying that vintage car they've eyed for a while.

There are some funds that seem especially appropriate for the holiday, such as  Fidelity Independence , Patriot , or any of the American Funds for that matter. But we thought we'd focus instead on the subject of independence itself. For investors who favor active management over index funds, an independent streak is typically something to be admired in a fund manager. After all, why pay high fees for a manager who's afraid to step away from his or her fund's benchmark when you could just buy the benchmark itself and lower your costs? A fund manager who is unafraid to blaze his or her own trail offers the possibility of avoiding the next market swoon or getting out ahead of its next big upward move. Of course, being an independent-minded fund manager can also mean trailing an index badly if your bet turns out to be wrong.

This potential to over- or underperform the market is precisely why investors should take the time to get to know just who is managing their funds and their tendencies, processes, track records, and outlooks on the market. Make sure you're comfortable with how they run the fund. If you are not comfortable with it, or don't think it's worth what they are charging you, it might be time for you to declare your independence from the fund.

With the theme of independence on our minds, we thought we'd take a look at some funds with independent-minded managers and Morningstar Analyst Ratings of Bronze or better. This is by no means a comprehensive list, but rather just a few names to get you thinking.

  Fairholme (FAIRX)
No fund exemplifies the highs and lows of an independent-minded manager more than this one. Manager Bruce Berkowitz has a well-earned reputation for making big sector bets, achieving outsized gains for years only to suffer through a devastating 32.4% loss in 2011 when his financials-heavy portfolio tanked and the S&P 500 added 2.1%. His continued faith in financials--they made up 77% of the portfolio at the end of February--has led to a nice rebound so far this year, with the fund gaining 24.6%, more than 17 points ahead of the average for large-value funds. Berkowitz isn't afraid of betting big on specific stocks either. In fact 92% of the fund's assets reside in its top 10 holdings, led by a 30% stake in  American International Group (AIG). This fund is not for the faint of heart, but for those who like a manager who marches to his own beat, Fairholme promises an interesting ride.

 Fidelity OTC (FOCPX)
Although most large-cap growth funds look to the S&P 500 as a benchmark, this fund takes the unorthodox approach of using the tech-heavy Nasdaq. The result is a concentrated portfolio that is heavier in tech and smaller-cap stocks than its peer group. Manager Gavin Baker likes companies with durable competitive advantages and strong earnings, which helps explain why  Apple (AAPL) makes up 14% of the fund's portfolio. About 45% of fund assets are in the portfolio's top 10 holdings. Despite above-average volatility, the fund has been a strong performer since Baker took the helm in July 2009, with three-year annualized returns of 18.3% compared with 15.9% for the large-growth category, putting it in the top quartile of the category for that time period.

 PRIMECAP Odyssey Aggressive Growth (POAGX)
This fund takes a contrarian growth approach, favoring companies that grew significantly in the past and still have potential for future growth but are temporarily undervalued. The fund also is unusually patient in waiting for its bets to pay off, as shown by its low 11% turnover rate. Although classified as a mid-cap growth fund, as of the end of March it held more than half of its portfolio in small and micro-caps. The fund goes heavy on health care and technology, which together make up nearly three fourths of the portfolio, more than double the category average for these two sectors. The fund's buy-and-hold philosophy served it well during the risk-averse markets of 2008 and 2011, when it outperformed its peer group by 9.2 and 3.5 percentage points, respectively, but caused it to lag by 3.0 points as the market rose in 2010. The fund's 20.4% return so far in 2012 beats its peers by more than 12 points and puts it in the top 1.0% of all mid-growth funds. Former comanager Howard Schow died in April, but the fund's three other comanagers, plus newcomer M. Mohsin Ansari, continue the fund's approach.

Performance data as of July 2.