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Mutual Funds
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| | Mutual Funds
A nimble fund that stays ahead of the market
The Bruce Fund is little known, but it has posted impressive returns for years. Its secret? Changing its strategy to suit the market.
By Timothy Middleton
The end of easy money is shaking financial markets like popcorn, except that everything is going to the bottom of the bag.
Risk has been punished mercilessly in the last four weeks, with the Nasdaq ($COMPX) dropping more than 6%, nearly twice the decline of the Standard & Poor's 500 ($INX). The newly ebullient Japanese market sank 8%. Emerging markets did worse.
Bonds, too, have been punished, with the average intermediate-term bond fund sinking 1.9%.
But there's at least one refuge.
Hybrid funds, which own stocks and bonds, have resisted the worst of the decline. But many of these are balanced funds, hewing to such standards as always owning 60% stocks and 40% bonds. Others have more leeway. They're considered tactical asset-allocation funds, with fluid mixtures of securities that managers adjust as markets shift.
Among these funds, the one with the best record is so tiny it doesnt have a ticker symbol and can only be bought in 10 states, although they include the big ones like New York, California, Illinois and Florida.
A quirky fund
It's the Bruce Fund, which has languished in near-total obscurity for more than 20 years. It's by far the quirkiest of funds of this type, whose better-known representatives include T. Rowe Price Capital Appreciation (PRWCX), which I profiled recently. That behemoth has assets of $3.43 billion. Bruce Fund has $11 million, and thats nearly twice the level of six months ago.
Bruce Fund is a throwback, literally, to a former age in mutual fund investing. Robert Bruce got into the business in the 1950s, and later helped launch a go-go growth fund that has since morphed into Gabelli Mathers (MATRX).
The way Bruce learned to invest was to search for attractive long-term prospects, and then hold onto them. We dont play a stock for 10% or 20%, he says. We have to think its got significant potential -- something we can hold for a long, long time.
The funds turnover of about 30% is less than half the 70% average in Morningstars conservative allocation category.
Even if he doesnt like a companys stock, he investigates its bonds, including convertibles. (Convertible bonds can be converted into stock under certain circumstances.) The bond portion of the portfolio, currently 50% of assets, can tilt toward the convertibility option. But it can also tilt toward busted converts, where the equity is worth little or nothing.
Betting on bankruptcy
One of Bruce Funds largest holdings, at about 5% of assets, is convertible bonds of Adelphia Communications, the bankrupt cable television operator. Creditors have been pressuring the companys board to auction it off rather than reorganize.
Wall Street estimates of its value range between $17 billion and $20.5 billion. Bruce thinks the actual price will be higher and the convertible bonds, worth $50 now, will rise above $80.
Bruce claims no special insight into the valuation process. We go by the seat of our pants here, he admits. He barely knows how to turn a computer on and his son and partner, Jeffrey Bruce, doesnt use computer modeling or other business-school methods, either.
Bruce gets his information from Wall Street. Its an open secret that most mutual funds rely heavily on the Streets research -- hence the lavish spending for it. But managers will almost never admit it.
Bruce, however, describes his research regimen this way: We listen a lot. Being a small firm, some people call on us who we think do very good work. His optimism about Adelphia comes from Merrill Lynch.
Consistent results
Rather than haphazard, however, Bruces routine has identified excellent investments with great consistency. Over the last 15 years, the fund has delivered annualized returns of 14.9%. This year, as of May 12, it was up 19%. Bruce Fund is the category leader in Morningstars database over every significant period, and its rivals are among the best funds in the industry.
| How Bruce compares | | Category % rank | 3 mos | 1 year | 3 year | 5 year | 10 year | 15 year | | Bruce Fund | 1 | 1 | 1 | 1 | 1 | 1 | | Dodge & Cox Balanced (DODBX) | 19 | 5 | 2 | 2 | 1 | 1 | | T. Rowe Price Cap Appreciation (PRWCX) | 3 | 4 | 1 | 1 | 2 | 2 | | Van Kampen Equity & Income A (ACEIX) | 18 | 22 | 8 | 3 | 3 | 3 | | Mairs & Power Balanced (MAPOX) | 2 | 27 | 6 | 5 | 4 | 5 |
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Notes: Conservative and moderate allocation categories combined. As of 4/30/2004
Source: Morningstar
Currently, the funds top stock holdings include three health-care names, America Service Group (ASGR, news, msgs), Atrix Laboratories (ATRX, news, msgs) and Elan (ELN, news, msgs). Among sectors, health care has been by far the strongest this year, with the average fund in that group up 5%, as of May 12.
Bruce shuns some industries he doesnt understand, including technology, and some he understands but doesnt like, including auto makers. He confesses to making abundant mistakes -- he owned Adelphia before its bankruptcy -- and they have often proved costly.
The fund slipped 6% in 1998 and a further 19.8% in 1999. In that period, Kiplingers magazine called us one of the worst funds, Bruce recalls. He was redeemed in the bear market, when the fund racked up double-digit returns in two of three years, and in last years bull market, when the fund soared 66.8%.
The movie Braveheart notwithstanding, Robert the Bruce is Scotlands greatest hero, and one of the fund managers great aunts claimed the family was a direct descendant of that legendary figure. After she died, however, her diary put the lie to the claim. She was a prevaricator, Bruce chortles.
Forget retirement
It would be tempting to assume a man who probably couldnt get a job in todays fund industry -- no MBA, no computer models, no proprietary valuation system -- would have to prevaricate to manufacture the best record in his group. But the results are on file with the Securities and Exchange Commission, and you can request copies at the funds toll-free number, 1-800-872-7823. (Contact information for the SEC Division of Investment Management is available here.)
Bruce is 72 and says he plans to retire two weeks after I die. His son is 46 and vows to continue running the fund; about a quarter of the firms assets are family money. He probably couldnt get a job anywhere else, either: No MBA, no computer models, no proprietary anything.
Meanwhile, asset-allocation funds are an excellent place for investors to prospect, and there are plenty of them. Here's a screen to help find them using MSN Money's fund screening tool.
At the time of publication, Timothy Middleton did not own any securities mentioned in this article.
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