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3 new funds that offer something truly new
Look-alike funds crowd the marketplace. You can find fresh ideas and a lot of promise, though, in these 3 newcomers.
By Timothy Middleton
In the last decade, the number of mutual funds has more than doubled to about 6,300 distinct portfolios. Most new funds are imminently forgettable. Van Wagoner Emerging Growth (VWEGX), which debuted in December 1995, has lost an average of more than 7% in each succeeding 12-month period.
More often than not, new funds are created merely to capture easy management fees by milking the theme of the moment. A year ago, the Vanguard Group came out with Vanguard Energy Vipers (VDE, news, msgs) and Pacific Life Insurance with PF Van Kampen Real Estate A (PFARX), a more expensive version of Van Kampen Real Estate A (ACREX). Both were introduced when their target investments and investor interest were red hot. The same could be said of Internet funds at the turn of the century.
Despite the risks, new funds can be profitable investments. In recent weeks, I've come across three new portfolios that seem to offer something genuinely fresh to investors. One fits into the small-cap growth category, where the best funds tend to close quickly. Another takes a highly successful approach and makes it less risky. A third gives you entre to managers whose flagship fund is closed.
In each case, they come from successful and experienced managers. That's no guarantee of success -- Garrett Van Wagoner had been a superstar, managing the Govett Smaller Companies Fund -- but it does increase the odds they'll perform well.
Old team, new fund, solid start
Columbia Management was a boutique investment firm taken over by Fleet Bank in 1997, which was then taken over by Bank of America in 2004. That was too much bureaucracy for Rick Johnson and Jeff Curtis, respectively Columbia's chief investment officer and president. They left last summer and immediately opened their own shop with a half-dozen other Columbia alumni.
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Their company, Tygh (pronounced "tie") Capital Management, has $600 million in assets, $150 million of them in the TCM Small Cap Growth Fund (TCMSX). Tygh created the fund for institutions that couldn't meet its $10 million private-account minimum. Curtis runs the business and Johnson the portfolios, which focus on small- and mid-cap stocks. In this fund's definition, "small" is companies with assets of $100 million to $2 billion. The fund's weighted average market capitalization is $1.2 billion.
So far this year, as of Aug. 26, the fund is up 8.2%, ranking it among the top 3% of similar funds in the Morningstar database. Before he left Columbia, Johnson built "an admirable long-term record," Morningstar analyst Laura Pavlenko Lutton wrote last summer.
The TCM fund owns 90 to 100 names, each of them because it's expected to grow sales and earnings at least 15% in each of the next two years, meeting or beating consensus earnings expectations. Turnover runs 100% or more, because Johnson is quick to dump losing bets.
Two of the fund's top positions now are Hornbeck Offshore Services (HOS, news, msgs) and Amphenol (APH, news, msgs). The former rents big vessels to deep-water drilling companies in the Gulf of Mexico. "They just beat last quarter's (earnings) forecast and raised their guidance," Johnson notes. Hurricane Katrina's devastation will create further demand for the company, which is based in Covington, La., near New Orleans.
Amphenol, headquartered in Wallingford, Conn., manufactures electrical connectors of the sort used in defense, automotive, aerospace and technology industries. Weakness in any one marketplace tends to be countered by strength in the others, the manager says.
The fund has a $100,000 minimum, but you can buy it through Charles Schwab with a minimum of $2,500. Tygh, an Indian name associated with the company's headquarters in Portland, Ore., vows to close the fund when the firm's total small-cap assets, currently $450 million, reach $1.5 billion.
Dialing down the risk
The rap on value investor Al Frank is that his flagship mutual fund, the Al Frank Fund (VALUX), is too wild a roller coaster to ride. It ranked among the top 10% of similar funds in three of its first six years -- and the bottom 10% in two of the others.
Frank died in 2002, but his protg, John Buckingham, has addressed this issue by coming out with a similar fund, except that only dividend-paying stocks are represented in the Al Frank Dividend Value Fund (VALDX). Cash payouts give stocks more stability than those that keep their cash to themselves.
Al Frank Asset Management is an all-cap investor, but, since dividends tend to come from bigger companies, the new fund fits into Morningstar's mid-cap value category. Other than that, it's a ringer for the original fund, which has delivered stunning average annual returns of 16.4% since inception in 1998. The new fund was launched last October.
Al Frank Dividend Value owns about 170 companies, broadly diversified but not along the market's line. It owns twice as many technology hardware companies as the Standard & Poor's 500 Index ($INX), including Motorola (MOT, news, msgs), Texas Instruments (TXN, news, msgs) and Nokia (NOK, news, msgs). It is very light on financial services, a usual suspect among value investors, and health care.
The new fund is up 5% this year as of Aug. 29, beating the market by nearly 4 percentage points. This is despite a burdensome expense ratio of 1.98%, owing to its small size -- just $25 million under management.
Buckingham warns that lower volatility brings with it the likelihood of lower returns than those of the flagship. "I've joked that we'll have more money in the new fund, despite lower returns," he says.
I think he's right on both scores. Since most investors buy when a fund's on a roll and sell when it lags, a more volatile fund can actually cost you money. Less volatility here is likely to attract more assets, even at the expense of lower returns.
The fund's minimum investment is $1,000.
A closed fund's close relative
The Vanguard Primecap Fund (VPMCX) is one of Vanguard's most successful growth funds; so successful that assets top $27 billion and the fund is closed to new investors. The new Vanguard Primecap Core Fund (VPCCX) is similar to its sibling but has a bit more of a value cast. Lipper calls this middle-of-the-road approach core; Morningstar calls it blend.
Primecap Core's prospectus says it's an all-capitalization fund, but, in practice, it's a giant-stock portfolio, with an average market cap of $24 billion. It is very similar to Primecap in its investment style; both funds count Eli Lilly (LLY, news, msgs) and Pfizer (PFE, news, msgs) among their top positions.
Like many Vanguard funds, Primecap and Primecap Core are managed by an outside firm -- in this case, Primecap Management. Writing of the Primecap fund in March, Morningstar analyst Jeffrey Ptak said Primecap Management "is enamored with firms whose heady growth prospects have been overlooked or underestimated in the face of uncertainty."
Primecap always ranks among the top funds in its category and is in the top 3% of its group over the last 15 years. Primecap Core is up 5.1% this year, ranking it among the top 4% of large-cap blend funds.
Primecap Core has an investment minimum of $10,000, even in IRA accounts, which usually have lower minimums. Introduced only last December, the fund's assets are already about $825 million.
There are no guarantees that any of these funds will be the best you ever owned. But they have a better shot at distinction than names picked by throwing darts. And since, as The Wall Street Journal has repeatedly demonstrated, throwing darts at stock tables picks out more successful investments than many portfolio managers, that's a real advantage.
At the time of publication, Timothy Middleton didn't own any securities mentioned in this article.
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