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Mutual Funds

Mr. Kirchner Starts a Fund

Morningstar calls this a small-company value fund but it doesn't really fit inside any style box.

Of the 22,006 names listed in our mutual fund database, not a single one is remotely like Pennsylvania Avenue Event-Driven fund. After contributing editor David Landis stumbled upon this creature, my curiosity was fueled by the fact that it had existed for more than three years right under my nose (as I write these words, I'm looking out on Pennsylvania Avenue). What does "Event-Driven" mean, anyway? And what's fueling its good results?

Envelope licker

Call 888-642-6393, and the person who picks up is Tom Kirchner, a one-man band -- the fund's founder, portfolio manager, back-office person and envelope licker. Accented English betrays his German citizenship. Kirchner came to the U.S. on a green card in 1999 to work for Fannie Mae as a financial engineer. Four years later, at age 35, he left Fannie and started the fund, which he runs from his apartment in Washington, D.C. Right now, Event-Driven has about 200 shareholders and $2.5 million in assets. Kirchner lives on his savings as he waits for management fees to build.


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The more I talked to this slender, bespectacled man, the more impressed I became. Morningstar calls this a small-company value fund, but it doesn't really fit inside any style box. Roughly two-thirds of the fund (symbol PAEDX) is invested in classic merger arbitrage -- that is, buying the shares of companies that are being acquired to capture the slender gap between the present stock price and the buyout price. That gap represents the risk that the deal won't go through. "I like situations involving private-equity firms," says Kirchner. "They have so much money to invest, and therefore so much incentive to make the deal work, that the risk is lower."

About a fourth of the fund is in shares of companies involved in proxy fights. The goal of a proxy fight is to force a company to do something its executives don't want to do. In the case of one Event-Driven investment, pipe maker P.W. Eagle, that something was to put the company up for sale. Sure enough, Eagle announced in January that it was being acquired, and Event-Driven will net a nice profit, Kirchner says. Less than 10% of the fund is in bonds of companies currently in bankruptcy.


I asked Kirchner what it took to start the fund. Typically, I hear that an up-front investment of at least $100,000 is required to fulfill the legal and regulatory requirements and equip an office. Kirchner says it cost him his time "and considerably less than $100,000." In his native country, he says, the legal barriers to someone of modest means starting a fund are almost impossible to overcome.

And did I tell you he writes a blog? It's called The Deal Sleuth and serves as an outlet for venting "my grief and anger when a merger goes bad." My favorite installment is his rant last October about shenanigans at Central Freight Lines, controlled by Phoenix Coyotes owner Jerry Moyes.

Nice results

The purpose of a fund like this is to produce steady, relatively low-risk returns that don't correlate much with the overall stock market, providing you with a different kind of diversification. Event-Driven returned 27% in 2004, 12% in 2005 and 11% last year. In technical terms, only about a fifth of its return can be explained by moves in the overall market. The expense ratio is 1.5%, and the minimum investment is $1,000.

I like this fund, as a small part of a portfolio. And I like that Tom Kirchner had the gumption to create it. Isn't this a great country?

Fred W. Frailey is editor of Kiplinger's Personal Finance magazine.