9
Morningstar FundInvestor
May 2
013
&
Cox is among the top
20
mutual fund firms by assets,
it doesn’t offer a broad spectrum of strategies. This
is a firm for die-hard value investors.
Best Boutiques
PRIMECAP
Odyssey was founded by former American
Funds managers and is a subadvisor for Vanguard. It
shares the strengths of both those fund companies.
The firm has kept talent in-house by giving experi-
enced analysts sleeves of money to run, and it has
lowered expenses to a point that gives its own
funds a considerable edge.
FPA
periodically closes its funds to protect their strat-
egies and doesn’t pay for shelf space on brokerage
platforms. While its contrarian value approach can
cause the funds to lag at times, founder Bob Rodri-
guez has fostered a culture that allows managers to
stand firm. Fees have always been low, and a re-
cent decision to convert the funds to a no-load struc-
ture broadens their appeal.
Some of the boutiques we admire most would rather
maintain their successful strategies than branch
out to bring in more shareholders. When
Longleaf
Partners Global Fund
LLGLX
was launched at
the end of
2012
, it was Longleaf’s first new fund since
1998
, while Mairs
&
Power’s
2011
introduction of a
small-cap fund was its first new fund launch in
50
years. Sequoia and Sound Shore have remained one-
fund shops.
The best parents are likely to produce the best funds,
but they don’t always. Take Hussman Funds, an ex-
emplary firm: Manager John Hussman invests nearly
all his liquid assets in the firm’s funds, two thirds
of profits go to charity, and expenses have decreased
as assets have grown. However, while Morningstar
Medalist
Hussman Strategic Total Return
HSTRX
may appeal to conservative investors,
Hussman
Strategic Growth
HSGFX
earns a Negative rating
for its poorly executed long-short strategy.
Worst of the Bad
Grant Park Funds may be the most egregious example
of poor stewardship we’ve uncovered. The firm offers
one fund,
Grant Park Managed Futures Strategy
GPFAX
, which charges exorbitant fees and does not
identify underlying subadvisors. Where is the
board of directors? They may be too busy to notice:
The fund is part of a series trust including
98
funds—
a lot for one board to keep track of.
Other small fund firms specializing in alternative
investments, such as Forward, LoCorr, and Quaker,
also fall short as stewards. Excessive expenses are
not uncommon, and the use of subadvisors often
means minimal manager investment in the funds.
The worst mainstream fund companies suffer from
unhealthy corporate cultures. Dreyfus has been going
through a rough transition to a subadvisory model and
is now minus a
CEO
.
DWS
and Guggenheim have
grown awkwardly through acquisitions. AllianceBern-
stein also represents an uneasy merger of cultures
and styles, and it has lost fund managers since a new
CEO
came on in
2008
.
UBS
is also losing investment
talent, and Gabelli is a one-man show facing signifi-
cant key-man risk.
These companies share other flaws. On average, only
15%
of fund assets at these firms are run by man-
agers with at least $
1
million invested in their own
funds; the best firms average
85%
. The worst firms
average a five-year manager-retention rate of
86%
,
compared with
97%
for the best. Their funds, on
average, charge expenses that rank in the most expen-
sive third of their categories, while the best firms’
funds are in the cheapest third.
Virtue Pays
The best fund companies averaged a ”success rate”
of
69%
over the five-year trailing period through
March
31
. That means
69%
of their funds landed in
the top half of their categories over that time. The
eight worst companies with a five-year record aver-
aged a success rate of only
24%
.
Investing in a fund from a topnotch firm will increase
your probability of future success.
œ
Contact Laura Lallos at
