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Fund Spy

An Intriguing International Fund Shines Outside the Spotlight

Its cost isn't appealing, but its other attributes are impressive.

Morningstar's fund analysts often write about the biggest and most well-known funds and fund companies. We know that a great many of you invest in these giants, or follow them with interest even if you don't own them personally. However, you've also made it clear that from time to time you'd like us to shine some light on lesser-known opportunities, whether established and successful or young and promising.

Here's one such offering (and its cousin).  Although Polaris Global Value (PGVFX) has received its share of attention in the financial media over the years, its name may not ring a bell. It doesn't have much in the way of assets. But the fund is worth noticing, though it would be more attractive at a lower cost.

Polaris Global Value
This fund is the flagship offering from Boston-based Polaris Capital Management, an 18-year-old firm founded and still led by Bernard Horn. The firm had more than $5 billion under management at the end of 2012, but the only mutual fund it offers to U.S. investors, Polaris Global Value, currently has just $200 million or so in its coffers. The firm does subadvise a fund with about $950 million in assets, Pear Tree Polaris Foreign Value (QFVOX) (Institutional shares, (QFVIX)), but even that hardly qualifies as a behemoth. (A younger subadvised fund, Pear Tree Polaris Foreign Value Small Cap (QUSOX), has about $110 million in assets.)

A look at Polaris Global Value's record may leave readers wondering why it hasn't attracted more attention. Through Aug. 1, 2013, the fund lands in the top half of the world-stock category over every standard trailing period from one year to 15 years. For most of these periods, the fund lands high in the rankings: Over the five-year stretch, it has beaten 90% of its category peers, and over the 15-year period it has beaten about three fourths of them. So far this year, Polaris Global Value is nearly 8 percentage points ahead of the category average.

The fund takes an all-cap approach, which is unusual for a world-stock offering. It currently has at least 10% of assets in each of Morningstar's five market-cap tiers, from giant to micro. In part, that makeup explains its impressive record. Most funds in the world-stock category concentrate on big companies, so this one benefited from its relatively hefty stakes in mid- and small caps during an era when such fare usually outperformed. As a result, Polaris Global Value's rankings aren't quite as impressive when compared only with the subgroup of world-stock funds with market caps under $10 billion. But even there, for the most part it lags only those with much smaller market caps than its $6 billion--true small-cap funds, which have received an even stronger tailwind from the market-cap effect that it has.

The subadvised Pear Tree Polaris Foreign Value (whose portfolio is basically Polaris Global Value with the U.S. stocks stripped out) has posted even better results in the foreign large-value category. All of its returns for the three-year period and beyond, including 15 years, top at least 90% of its rivals. True, it too benefited from its all-cap strategy, but the results are impressive nonetheless.

Horn has been lead manager on both funds for their entire histories, so he's primarily responsible for those fine records. He has about 30 years of investment experience and works with a team of four research analysts, two of whom are listed as assistant managers.

Not What You're Looking For
With such noteworthy records, why don't these funds have more assets? Three reasons are most likely. One, it's simply hard for any fund to get noticed in a very crowded mutual fund landscape, especially those without the backing of major industry players and their generous marketing budgets. Second, the Polaris funds have higher-than-average expense ratios even when compared with actively managed peers. That can't help in an era when more and more advisors and individuals put a high priority on costs when making their purchase decisions.

Finally, despite their very strong long-term returns, the funds stumbled during the 2007-09 market meltdown, suffering even greater losses than their benchmarks and category averages did. At that time, and ever since, many rattled investors have put a high priority on defense. Such folks are looking for funds that can provide something of a cushion when markets tumble, not those that lost more than their peers. (The funds didn't distinguish themselves when foreign markets declined sharply in 2011, either.)

In Their Favor
But long-term investors who are willing to hold on or even add to their stakes during downturns might be interested in these funds--especially if their costs came down through asset growth or other means. After all, there's more to like about these funds than their performance figures. Horn, who favors underpriced companies with solid market positions and strong long-term potential, builds portfolios that differ considerably from all major indexes, and he moves at a very measured pace. Indeed, the fund's country weightings, sector exposure, and individual holdings all stand out. And Polaris Global Value's turnover rate has been under 15% for three straight years.

Meanwhile, Horn's investment approach will appeal to those who want their active managers to show true conviction. For example, one reason the funds suffered more than most in the financial crisis was that (as Horn told Morningstar at the time) he was convinced that his handful of U.K. homebuilders--unlike their U.S. counterparts, which he did not own--were in much better shape than most investors thought. So he stuck with them, and in fact added to his stakes. That was a tough decision to take as the homebuilders' share prices plunged and sentiment toward anything housing-related crumbled through 2008 and into early 2009. But Horn's fortitude paid off. The stocks rebounded sharply as soon as 2009's rally took hold, remained flat for a time, and then soared again in late 2012 and 2013.

Horn retains his contrarian nature and long-term focus. In this year's second quarter, for example, he wasn't spooked by the weaker-than-expected sales of Samsung's Galaxy S4 smartphone and that stock's subsequent share-price decline. He added to the fund's stake in Samsung at the lower prices, contending that the firm remained fundamentally strong.

Because of its small size, Polaris Global Value is not currently on Morningstar's analyst coverage list, so it doesn't have a Morningstar Analyst Rating. If it did, its relatively high expense ratio would count against it (though to a certain extent its ultralow turnover, which minimizes trading costs, offsets its higher-than-average 1.36% expense ratio). Several other factors would be in its favor. 

Readers can take a look and make their own judgments. However, given Horn's dedicated contrarian approach, even at a lower cost his funds would be appropriate only for investors confident that they would stick with them during those difficult times when Horn's atypical approach and penchant for differing with the crowd backfires. 


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