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Mutual Funds

Three More Fund Managers to Buy

A top-notch investor tips us off to these tiny companies.

Managing other people's money is a lucrative business, as we noted in a story spotlighting three large fund-management companies (see Who Needs Funds? Buy the Fund Company, Feb.). Soon after the story ran, we received a handwritten note from mutual fund manager John Keeley, who urged us to look into three smaller asset-management firms that had escaped our scrutiny: Epoch Holdings, Diamond Hill Investment Group and Hennessy Advisors. Keeley knows a thing or two about managing money, not to mention overlooked small companies. His Keeley Small Cap Value fund returned an annualized 16% over the past ten years to February 1, the 14th-best record among diversified U.S. stock funds. We don't take Keeley's advice lightly.

Epoch manages money primarily for large institutions and wealthy investors, although it also offers three no-load mutual funds that require just $2,500 to start. A young company that went public in 2004, Epoch is not yet profitable, but its assets have grown rapidly, climbing from $1.4 billion in mid 2005 to $4.4 billion at the end of 2006. Money managers typically earn fees based on a percentage of the assets they run, so rapid asset growth is a good sign. Once revenues cover fixed costs, profits can grow quickly. Epoch shares (symbol EPHC) fetched $10 in mid February, giving the company a market value of $193 million.

Diamond Hill, best known for its hedge-fund-like Long-Short fund, saw its assets under management grow 171%, to $3.1 billion, in the year ended last September 30. Quarterly profits rocketed to 61 cents a share, from just 4 cents a share, in the year-ago period. The stock (DHIL) trades at $109, or a lofty 36 times trailing earnings. Diamond Hill has a market value of $199 million.

Hennessy Advisors runs six no-load funds that use set formulas to select stocks. Assets have grown primarily through acquisitions, though the firm made no deals in 2006. At year-end 2006, assets were $2 billion, up 11% in a year but down from a high of $2.2 billion in March. At $25, the stock (HNNA.OB) trades at 23 times the previous 12 months' earnings. The market value is just $96 million.


Keeley says his firm has a 5% stake in Epoch, and he owns all three of the stocks in his personal portfolio. He acknowledges that the three are relatively expensive. Shares of Epoch and Diamond Hill have tripled in the past year. Still, these firms are small and could continue to see rapid growth in assets and profit margins. In addition, says Keeley, all three could be takeover candidates.