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February 2005  Email this  Print this
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FUNDS
16 Funds We Love
We are fond of saying here at Kiplinger's Personal Finance that there may be 17,000 mutual funds -- but there are not 17,000 brilliant fund managers. You could probably count the truly brilliant managers on your own fingers and toes or, to be really generous, your fingers and toes and those of your significant other. Find those people and a large part of your job as an investor is over. We accepted the challenge on your behalf. Our writers narrowed the field of 17,000 funds to a mere 16 that stand far above the crowded field and describe what sets them apart, sometimes in personal terms. Our only criteria are that the funds be accessible and economical for self-directed investors such as yourself -- that is, open to new investors and not shackled with sales fees.
American AAdvantage Small Cap Value Plan
I have a lazy streak. I spend a good portion of my waking hours talking to fund managers and thinking and writing about funds. So guess what? My personal investments often get short shrift. That's why I like American AAdvantage Small Cap Value Plan -- it runs on autopilot.
Bill Quinn does the heavy lifting for me. Quinn and colleagues get paid for hiring, monitoring and (when necessary) firing the outside managers who run this fund (symbol AVPAX). Quinn, 57, is no neophyte. He's been supervising investment managers for American Airlines since the late 1970s.
Each of the fund's outside managers also invests money for American Airlines' pension fund. Only the best managers are chosen for this or other American AAdvantage funds. "We get to know the people well and their investment processes well before we pick them for the funds," Quinn says. "We try to have a diverse group of quality managers who will buy growing companies at a discount."
The results speak for themselves. In each calendar year since its 1999 launch, the fund has finished in the top third of those specializing in undervalued stocks of small companies. Remarkable consistency of this sort propelled it to the top tenth of such funds for the past three and five years.
As stated, the managers are first-rate. Brandywine Asset Management (a highly respected value shop and not connected with the Brandywine fund group) invests 49% of the fund's assets. The managers of Hotchkis & Wiley Small Cap Value, a superb load fund that's closed to new investors, handle 21% of the money. Barrow, Hanley, Mewhinney & Strauss is in charge of 25%. The Dallas-based firm is best known for managing 70% of the assets in Vanguard Windsor II, as well as all of Vanguard Selected Value.
A great advantage of the multimanager approach is that as one firm begins to top out on assets under its belt -- more is not better when it comes to investing in small companies -- Quinn can simply hire another talented outside stock picker and send new investments in that direction. This happened recently with the addition of Boston Company, which now invests 5% of the fund's assets.
No, you don't get frequent-flier miles with this fund. But annual expenses are a modest 1.16%. At that price, I'll buy my own plane ticket.
--Steven T. Goldberg
Brandywine
Do you take your investing seriously? The folks at Brandywine (BRWIX) take it very seriously, at least during working hours. The founding manager, Foster Friess, kept meetings short by making everyone stand. Friess is semiretired today, but old habits die slowly. There are still no chairs at staff meetings.
Brandywine's thing is growing companies, and the faster they grow, the better. When I visited Friess's successor, Bill D'Alonzo, in Delaware recently (yes, he offered me a chair), he reported that the average Brandywine holding was expected to increase its earnings 54% in 2004. That's fast. Of course, speed kills, too, so how does Brandywine keep from driving off the cliff during bear markets, as do most other funds specializing in rapidly growing companies?
The answer, D'Alonzo explains, lies in two other ingrained habits at Brandywine. First, its 27-person investment team tries to know a company as well as the executives of the company itself do. They maintain a vast database of numbers, rumors and opinions about each stock, including what customers and competitors are saying. At the first sign of trouble -- at the first inkling that the investment premise isn't working -- Brandywine is out of there.
Second, the fund is careful not to pay too steep a price to own these fast-growers. Amazingly, reports D'Alonzo, the average price-earnings ratio of Brandywine's portfolio is a market-matching 17. Brandywine took a 47% hit during the 2000-02 bear market -- the same as Standard & Poor's 500-stock index. Compare that to the 62% lost by AIM Aggressive Growth, the 73% by American Century Giftrust or the 76% by PBHG Growth, three other go-for-broke growth funds. Compared with the average growth fund, Brandywine is 15% to 20% less volatile.
Given its defensive armor, Brandywine's returns are not off the charts in any given year -- this is no shoot-the-lights-out fund. Because it invests in companies of all sizes, it's fair to compare it to all growth funds, and in that company it is a second- or third-decile fund over the past three, five and ten years-in other words, a good growth-stock anchor to any portfolio.
--Fred W. Frailey
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