Mutual Funds
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An off-the-shelf fund portfolio that delivers
Pearl Total Return is a fund that invests in other funds, which means a higher burden of fees. But the returns from its diverse portfolio may justify the higher costs.
By Timothy Middleton
Out in Muscatine, Iowa, on a bend of the Mississippi River just down from Davenport, you find some of the most fertile soil in the United States. This is where corn comes from, and not much else, except freshwater mussels, whose shells were used in the 19th century to manufacture "pearl" buttons.
"You can watch the corn grow or you can watch your money," says Christopher Hoffman, co-manager of Pearl Total Return Fund (PFTRX), whose offices are in a 150-year-old building as firmly fixed to the prairie as the fictional town of Lake Wobegon, a few hundred miles to the north.
"We think it's an advantage to be removed from Wall Street," says Hoffman, and not just because he's got a better view of all that maize. His fund is up an amazing 13.7% this year, as of Dec. 7. Wall Street, as measured by the S&P 500 index, is up about half as much.
Muscatine, which calls itself the "Pearl City," has spawned a 21st-century pearl: a gem of a fund wrapped in a shell of obscurity, with assets of only $71.5 million. It spent its first 30 years as a privately managed portfolio, mostly for not-for-profit organizations. Co-manager Robert Solt spent most of his career in the public sector, and lead manager David Stanley is a former politician who's now chairman of the National Taxpayers Union.
But that private record has been audited and accepted by rating services like Morningstar, which gives it its top rating of five stars for the last three, five and 10 years. During each of those periods it ranked among the top 10% of similar funds. The fund opened to the public three and a half years ago.
The people speak
I first heard about Pearl at MSN Money's Start Investing community, which I moderate. A member asked about it, based on its sterling record. Another member who identifies himself as Kenster quickly pointed out it is not a conventional fund, but rather a fund that owns other mutual funds. That means it slaps its own management charge, of 0.98% annually, on top of those of the underlying funds.
"In total, it effectively amounts to over 2%" in annual fees, Kenster wrote. "Depends on how much you're willing to pay for an auto funds-of-funds type of investment."
Related mutual fund resources
I confess that I hate the funds-of-funds idea when it means an extra layer of fees. That's also why I don't have a broker or a financial adviser, either of whom would charge me at least 1% a year. But if you are willing to pay for such professional help, you could do a lot worse than Pearl Total Return.
Pearl's managers are asset allocators, and they've been successful of late because they have greatly stressed foreign equities, as well as domestic value funds. At the end of the third quarter, non-U.S. stocks accounted for 40% of the fund's assets. Domestic stocks were 34%, and the balance was split between bonds and cash.
"We believe that we live in a global economy now and it's probably a mistake to invest just inside the United States alone," says Hoffman.
A top-tier list
Pearl's portfolio of about 16 funds includes some of the choicest in the industry.
| Pearl Total Return Fund's top holdings | | Fund | Portion of assets | YTD performance | | First Eagle Overseas I (SGOIX) | 19.3% | 17.9% | | Oakmark International Small Cap I (OAKEX) | 11.8 | 24.4 | | Matthews Asian Growth & Income (MACSX) | 10.8 | 19.3 | | N/I Numeric Investors Small Cap Value (NISVX) | 7.8 | 18.3 | | Dodge & Cox Balanced (DODBX) | 7.4 | 10.8 |
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Notes: Holdings as of 11/30/2004. Performance as of 12/7/2004.
Source: Fund, Morningstar
Many of the names in the portfolio are familiar to regular readers of this column, such as Keeley Small Cap Value (KSCVX), which I profiled in July and which is up 24.6% this year.
Among the fund's other advantages, it offers entre to a number of top-flight funds you can't buy because they're closed, like First Eagle Overseas I (SGOIX), Oakmark International Small Cap I (OAKEX), Dodge & Cox Balanced (DODBX) and Wasatch Core Growth (WGROX). (Hoffman says the fund doesn't enjoy any special advantage; it either bought them before they closed or buys institutional shares unavailable to you and me.)
It holds onto them for a long while. The average fund remains in the portfolio for three years.
Picking the pickers
The blend of funds produces a portfolio diversified among most asset classes. You could consider it an off-the-shelf version of a custom portfolio a financial adviser might construct. It's light on volatile industries like technology and heavy on consumer and other traditional businesses.
"We overemphasize areas we think are going to do better over the next six to 12 to 18 months," Hoffman says. The fund leaves everything else up to the managers of the underlying funds. "We pick the pickers," he says.
The Pearl fund doesn't prosper in every environment. It did poorly in the surging bull market from 1995 through 1998, and lagged both the S&P 500 and the MSCI EAFA global index in 1994. But it has beaten both of these measures every year since 1999.
This record would suggest a strong value bias, and it certainly displays such a bias now. But that's the kind of bias you want in a low-return market, and nobody I know is predicting anything else for the foreseeable future.
Bridging the gap
Some mutual funds are popping up on computer screens with values that appear to have fallen 15% overnight. Don't be concerned about this gap down, which happens when funds make their annual capital gains distributions.
It works like this: A fund with a net asset value of $10 distributes $1.50 in gains and income. The net asset value falls to $8.50. But you still have $10, in the form of your original shares, plus reinvested dividends or a cash payout.
That's why December is a terrible time to buy new funds outside a tax-deferred account: You could get hit with a tax bill on that $1.50, even though you didn't earn it. In taxable accounts, don't buy funds until after they've paid the distribution.
At the time of publication, Timothy Middleton didn't own any securities mentioned in this article.
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