A Short List of Funds That Invest With Conviction

Investors appear to be getting more discerning about their mutual fund purchases. They have been steadily streaming into index mutual funds and exchange-traded funds, no doubt attracted by their low costs and the fact that most active managers do not beat their benchmarks over long periods of time.

An all-index portfolio can be a cost-effective--and just plain effective--way to build a portfolio. That said, not every active fund automatically belongs on the cutting-room floor. Some managers have earned their keep over time by investing with conviction: building cash rather than buying overpriced stocks, for example, and eschewing the biggest names in benchmarks like the S&P 500 if they don't find them fundamentally attractive. In this article, I discussed large-cap funds with decidedly un-benchmarklike portfolios.

Another way to assess whether a manager operates with conviction is to assess his or her approach to portfolio construction and maintenance. Does management believe enough in its picks to pack a lot of assets behind them? And once the position is established, does management stick with the holding for the long term? Both can be evidence of a manager who acts with conviction.

Of course, a concentrated, low-turnover style doesn't guarantee strong investment results, and at a minimum the concentration may contribute to some extra volatility. But some of the best investors--notably Warren Buffett--have used such an approach to good effect. To help identify solid mutual fund managers who do so, we used our

to look for Morningstar Medalist equity funds that maintain concentrated portfolios of fewer than 40 holdings and also keep turnover low--under 25%. We screened out funds of funds; while it may appear that they have ultrastreamlined portfolios, in reality their underlying holdings are quite diffuse. Some of the best funds that combine both low turnover and concentration are closed to new investors--concentration, in particular, doesn't lend itself well to a large asset base. Thus, we added a final screen to home in on those high-conviction funds that are still accepting new-investor assets.

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to view the complete list; here's a closer look at three of the funds that made the cut.

Category: World Stock | Analyst Rating: Silver

With just 20 holdings as of its most recently available portfolio and 53% of assets in its top 10 names, this fund handily cleared our high-concentration screen. That has contributed to above-average risk levels, but senior analyst Greg Carlson says there's more diversification here than meets the eye. It's a world-stock fund, so investors get geographic diversification, and they also receive a decent amount of sector diversification; the financials and tech sectors are two of management's favorites. It's a best-ideas fund from two of Oakmark's top managers, Bill Nygren and David Herro, with Nygren running the domestic-equity slice and Herro handling foreign stocks. The pair employs the "house style" of management firm Harris Associates, seeking companies that are trading at a significant discount to what they think they're worth. They've done a terrific job thus far, beating their typical peer and the MSCI World Index since inception.

Category: Large Growth | Analyst Rating: Silver

In contrast with the Oakmark fund, whose recent performance has been hot, this fund's recent results look underwhelming. While its returns are decent in absolute terms, they fall into the bottom third of the large-growth category. Senior analyst Dan Culloton is a believer in manager David Rolfe's sensible strategy, however. Rolfe seeks companies with defensible advantages--100% of the portfolio is currently classified as having a wide or narrow moat--and waits for them to fall to reasonable valuations. Although the mutual fund has only been around since late 2010, Culloton notes that a separate account managed in the same style has delivered strong risk-adjusted results, outperforming in the early '00s dot-com-related market bust as well as 2008's financial crisis. The fund recently hit our screen as one of the Medalist funds with the highest weightings in the energy sector relative to its peers.

Category: World Stock | Analyst Rating: Silver

Like the RiverPark fund, this offering is in the midst of a lackluster performance run: Its three-year results land in the category's bottom 10%. But senior analyst Kevin McDevitt says that this is the result of management sticking to its focus on companies that both offer high dividend yields and are selling at attractive valuations--criteria that have led management to heavily emphasize European equities at the expense of U.S. names. McDevitt notes that the fund's foreign-stock weighting--at nearly 70% of assets--is one of the highest in the world-stock category. That positioning has hurt results as U.S. stocks have rallied at the expense of foreign. The fund's unhedged currency positioning has also hurt it relative to peer