VALUE ADDED


Where to Find Good Funds

Steven Goldberg

The best place to find superior funds is at companies that specialized in mutual funds -- not at banks, insurance companies and other financial conglomerates. Below are some of the best fund firms.



Looking for a good mutual fund? Try a mutual fund company. That may sound flip, but I'm serious. You'll improve your odds of success by avoiding funds sponsored by banks, insurance companies, brokerages and any and all manner of other companies for whom mutual funds are a sideline, not their chief business.

It's common sense. Someone who has a day job at an ad agency and tinkers with cars on weekends probably isn't going to do as good a job fixing your car as a full-time mechanic. Warren Buffett credits his success to staying within his "circle of competence."

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But try telling that to Wall Street.

Bank of New York is proposing to take over Mellon Financial Corp. Mellon has more than $900 billion under management in 13 different parts of the company. Most of its business is geared to institutional investors. Dreyfus, the company that popularized money market mutual funds, is just one of Mellon's units. The Dreyfus funds have been mostly mediocre for years. This deal seems unlikely to improve performance.

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Then there's Putnam. Performance of most Putnam's funds has likewise been subpar -- plus the firm was a bad actor in the rapid-trading scandal of a few years back. Putnam is a part of Marsh McLennan Cos., whose other businesses are insurance and consulting. Marsh has now put Putnam on the block. Bidders include an Italian banking giant, a Canadian financial services conglomerate and Amvescap, a giant global asset manager. The AIM funds, which are Amvescap's main U.S. fund line, are, for the most part, nothing to write home about.

Morgan Stanley and sibling Van Kampen offer largely unexceptional funds. Owner Morgan Stanley has lots of other fish to fry besides funds. I daresay funds aren't what CEO John Mack thinks about on his way to work every morning.

The fact is that it's difficult to find top-performing funds in companies that don't specialize in mutual funds. Why? At Goldman Sachs, UBS, ING Group and many other financial giants, the main focus simply isn't on funds for individual investors. Brokerage firms, insurance companies and banks often run mutual funds, but their fund units are typically a backwater. Few people go to work at a Goldman Sachs hoping to manage a mutual fund. The action is elsewhere.

Kudos to Merrill Lynch and Citicorp's SmithBarney for selling off their mutual fund arms after many years of lackluster returns. The dream of a financial-service supermarket that can be all things to all people never made a whole lot of sense -- but has been repeatedly pursued for decades by people who should have known better.

Where to look for good funds

David often beats Goliath in the mutual fund world. A small group of men and women who work well together, adhere to the same or similar investment strategies, and have some skin in the game tend to produce the best results. It's okay to have an outside owner or part-owner -- so long as it doesn't interfere much.

Here are some notable examples of first-class fund firms:


  • Wasatch, which sticks to smallish, fast-growing companies.
  • Baron, a growth shop run by Ron Baron, whose name is on the door.
  • Third Avenue Value, run by Marty Whitman, a venerable bargain hunter.
  • Marsico funds, where Tom Marsico calls the shots. Marsico is managing a lot of money, but the shop is small and focuses only on growth stocks.
  • Bridgeway, a quant firm under the leadership of John Montgomery.
  • Oakmark funds, all of which stress value.
  • Longleaf Partners, another superb value shop.
  • Dodge Cox, still another fabulous value manager. The San Francisco-based firm offers just four funds, but all are top-notch.
  • Being relatively small is a plus. But T. Rowe Price has demonstrated that you can continue to excel so long as you maintain a first-class corporate culture -- and stay focused on long-term performance. So have the American funds -- the nation's largest fund family if you exclude money-market funds. I worry about asset bloat there, but if anyone can overcome an immense asset base, it's the American funds.

    There's not just one model for success. Artisan funds invest in different ways because the firm hires top managers and gives them lots of independence. Artisan goes so far as to allow each marquee manager to hang his or her hat in any city. Fund giant Vanguard subcontracts out management of most of its actively managed funds, squeezes costs and produces good results. So does much smaller Harbor.

    At the end of the day, corporate culture may be the most important thing in determining whether a fund manager does well or not so well. People who like their work, who feel appreciated, who are surrounded by people of like mind and, of course, who are paid a lot of money, do tend to work harder -- and better. And it's very difficult to create a good corporate culture for fund managers outside a fund company.

    Steven T. Goldberg is an investment adviser and freelance writer.




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