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Mutual Funds

Bear Market Bonus: 7 Great Funds Reopen

With fewer assets, funds that were previously shut are now clamoring for your business.

Investors are once again investing, and that means they've rediscovered stock funds. After pulling some $285 billion out of stock funds from November 2007 through March 2009, they added $42 billion from April through June. This kind of behavior isn't surprising.

Investors tend to jump ship during bad times and pile back into stock funds when markets crackle. And stocks have performed exceedingly well since bottoming on March 9. From that date through June 30, Standard & Poor's 500-stock index returned 37%, while the MSCI EAFE index, a measure of stocks in developed foreign markets, jumped 46%.

The bear market inflicted plenty of pain, but it did come with one benefit. Since January 2008, more than 170 funds that had previously closed to new investors because they attracted too much money to operate efficiently have reopened to new clients. Among this crowd, you can find many solid funds that buy small-company and foreign stocks, as well as a few that specialize in large-company stocks.

Just because a fund reopens doesn't make it an automatic buy. To identify the most alluring of the comeback kids, we looked for funds with the right combination of below-average expenses, seasoned managers and records of consistently beating their peers over the long term. Eleven funds fit the bill. We profile seven of them; we previously added the other four to the Kiplinger 25 (see More Stellar Funds Reopen).


In search of Steady Eddies

Neuberger Berman Genesis (symbol NBGNX) has delivered solid results by taking a flexible approach toward small-company stocks. Judy Vale and Bob D'Alelio, who lead the fund's four-person team, start by assessing the economic climate, then pick stocks they think will flourish in that environment. Currently, the fund is tilted toward stocks of companies in the health-care, defense and energy industries. That's because the managers see demand in these areas remaining strong regardless of how the U.S. economy performs. Beyond their big-picture analysis, the managers look for niche players that generate plenty of cash and have strong balance sheets.

The team especially likes hard-to-classify companies that Vale calls "steady Eddies." For instance, the AptarGroup (ATR), one of the fund's ten biggest holdings, makes specialized packaging for the food and drug industries and has a division that makes perfume. "A little over 13% of the portfolio is in steady Eddies," says Vale, who has managed Genesis for more than 15 years. Other holdings include Church & Dwight (CHD), the maker of Arm & Hammer baking soda, and Matthews International (MATW), a casket manufacturer.

The fund's quirky investments haven't harmed returns. Over the past decade, Genesis has trounced the typical small-company fund by an average of seven percentage points per year.

Hands-on approach

The folks at Century Small Cap Select (CSMVX) stay in close touch with the companies whose shares they own or are contemplating owning. Managers Lanny Thorndike and Kevin Callahan, along with a team of analysts, expect to meet with rank-and-file workers as well as executives from at least 80 companies this year. They also speak with a company's competitors, suppliers and customers. "With so much uncertainty about next year's earnings, this is the time meeting with companies really matters," says Thorndike.


Thorndike, who has run the fund since its inception in December 1999, says he and Callahan look for firms that are consistently profitable. To them, that means companies with an average return on equity (a measure of profitability) of 15% over rolling three-year and five-year periods. They also favor companies with the potential to double their book value (assets minus liabilities) over five years.

Despite the stock market's recent rebound, Thorndike still sees plenty to like. "About twice a decade you get the opportunity to buy leaders at laggard valuations," he says. Technology names -- such as Polycom (PLCM), a producer of teleconferencing equipment, and Websense (WBSN), a maker of Web-filtering software -- are among the fund's top holdings.

Century Small Cap's long-term record is superb. From its start through June 30, the fund returned an annualized 8%, beating its category by an average of nine percentage points per year. "We're aiming more for singles and doubles rather than trying to buy a stock that is going to go up 100% or more in one year," Thorndike says.

Sleep-tight investor

Like his mentor, the redoubtable Marty Whitman, Curtis Jensen says he searches for stocks that are "safe and cheap." On the price side of the ledger, Jensen, manager of Third Avenue Small-Cap Value (TASCX), buys a stock only if it trades at a discount of at least 50% to what he thinks the company is worth. As for safety, he prefers financially strong companies with veteran management teams. "When it comes to investing in stocks, having a fortress-like balance sheet is critical for our sleep-at-night factor," Jensen says. Examples of stocks that meet his criteria: Cimarex Energy (XEC), a Denver-based oil-and-gas exploration company, and Electronics for Imaging (EFII), a manufacturer of components and software for printers.


Jensen recently had about 60 stocks in his portfolio. "The fund is more concentrated today than it has been in quite some time," he says. "We would rather spend more time on fewer things than try to protect ourselves by wildly diversifying."

Tucked inside the fund is a slug of distressed debt. Jensen thinks the debt of companies on the verge of or in bankruptcy can produce returns similar to those for stocks, but with less risk than stocks. If a bond's issuer goes into bankruptcy, the debt is usually converted into stock. As of April 30, Third Avenue had about 5% of its assets in distressed debt, including MBIA, a bond insurer; W&T Offshore, an energy producer; and trucker Swift Transportation.

Over the past decade, the fund beat the Russell 2000 index of small-company stocks by an average of four percentage points per year. The fund's minimum initial investment is $10,000, but you can open an IRA with just $2,500.

One-stop solution

If you want the simplicity of a single fund that owns both stocks and bonds, you'd be hard-pressed to find anything better than Oakmark Equity & Income (OAKBX). Holding a mix of, generally, 60% stocks and 40% bonds, Oakmark has regularly whipped its rivals. In its 13 full years of operation, the fund has landed in the top 20% of balanced funds nine times and has never been in the bottom 40%. In 2008, the fund lost 16%, compared with the S&P 500's 37% plunge.


Managers Clyde McGregor and Ed Studzinski pick from a list of companies generated by Oakmark analysts. Approved companies are financially strong and sell at a steep discount -- ideally, 60% or more -- to Oakmark's estimate of their true value. McGregor and Studzinski have placed heavy bets on natural-gas producers EnCana (ECA) and XTO Energy (XTO), and on Laboratory Corp. of America (LH) and PerkinElmer (PKI), which are involved in health-care services and medical devices, respectively.

The fund holds more stocks of small and midsize companies than the typical balanced fund. That's because McGregor and Studzinski think they're more likely to add value by studying smaller companies than by focusing on the behemoths. On the bond side, the fund invests mostly in Treasuries and a handful of high-quality corporate bonds.

McGregor and Studzinski eat their own cooking. Each has more than $1 million of his own money in Equity & Income, according to fund filings. "By far, my largest personal investment is in the fund," McGregor says.

Buffett aficionado

Ronald Reagan was president the last time Sequoia (SEQUX) fund was open to new investors. Founded by the late William Ruane, a friend of Warren Buffett, Sequoia fund adheres to Buffett's investing style. Co-managers Robert Goldfarb and David Poppe buy stocks of companies that they think are cheap relative to their true worth, have competitive advantages and can grow over the long term. The managers hold relatively few stocks -- 29, at last report -- and hang on to them for long periods. The fund's annual turnover ratio of 12% implies that Goldfarb and Poppe hold stocks for more than eight years, on average.

Sequoia is betting that strapped consumers will continue to trade down to cheaper goods at discount retailers. The fund recently held Costco (COST), Target (TGT), TJX Cos. (TJX), Walgreen (WAG) and Wal-Mart (WMT). "Clearly, the consumer is looking for ways to save money," Goldfarb and Poppe wrote in Sequoia's latest shareholder report, dated March 31. "In this regard, we feel that some of our holdings are very well positioned."

Goldfarb has been with the firm that runs Sequoia since 1971. Since he became the fund's lead manager in 1998, Sequoia has beaten the S&P 500 by an average of two per-centage points per year.

Spotting global growth

As its name suggests, William Blair International Growth (WBIGX) goes where the growth is -- and for manager George Greig, that means looking for beneficiaries of rapid advances in Asia. But following that strategy doesn't mean investing only in Chinese and Indian stocks. "Companies in developed markets benefit, too, because they are participating in emerging markets as suppliers or investors," Greig says.

Greig looks for industry leaders that are gaining market share. H&M, a retailer based in Sweden, is typical. "H&M is developing a merchandising strategy that appeals to people in a lot of different countries, and it offers great value to people up and down the income spectrum," says Greig.

The bear market was particularly unkind to International Growth. The fund plunged 52% in 2008, trailing the MSCI EAFE index by nine percentage points. Relative to other diversified, large-company overseas funds, International Growth held more small-company and emerging-markets stocks, sectors that hurt performance last year. But Greig's long-term record is superior. Since 1996, when he became lead manager of International Growth, the fund has outpaced the EAFE index by an average of five percentage points per year.

Bargain hunters abroad

The world has become a candy store for David Samra and Dan O'Keefe, managers of Artisan International Value (ARTKX). The pair typically buy foreign stocks that trade at least 30% below their estimate of a company's intrinsic value. But so many companies today are on sale that they won't consider a stock unless it's trading at a 45% discount or more.

The managers focus on small and midsize companies, but their fund can invest in firms of any size. In fact, Swiss drug giant Novartis (NVS) is one of its ten biggest holdings. Most of the fund's assets are in European and Japanese stocks, and it may not place more than 20% of the portfolio in emerging markets.

Experian (EXPN), a financial-services company based in Ireland, exemplifies the managers' approach. The company, they say, has grabbed market share from its prime rival, Equifax, during the recession. Moreover, Experian's credit-bureau business in Asia and Brazil should fuel earnings and revenue growth. In early July, Experian traded at about 11 times earnings; Samra thinks the shares should fetch 16 to 18 times earnings.

Samra and O'Keefe shun companies that carry a lot of debt. That prudence helped them during the financial crisis. The fund lost 30% in 2008, outpacing the EAFE index by 13 percentage points. Since the fund's 2002 start, it has beaten the index by an average of five points per year.