Chicken Little Growth Goes Sky High
New funds with cheesy names and unproven managers usually aren't noteworthy. But when a fund rockets out of the starting gate with a 41% return in its first 12 months of existence (and happens to clobber its average peer by more than 38 percentage points), it certainly merits examination.
The fund in question is called Chicken Little Growth. Manager and founder Steve Coleman chose the name because he thinks most investors are chicken and he wanted to create a fund for "people who were afraid of the market."
But this is no stodgy, low-risk fund. It is extremely concentrated. Chicken Little Growth (symbol CHKNX) typically holds 20 to 25 stocks, and even that understates the degree of concentration. Three stocks -- Apple Computer, Caterpillar and Advanced Micro Devices -- account for 56% of the $600,000 fund's assets. Apple alone accounts for 35% of assets. Thanks to outsized bets like this, the fund sizzled in its first month out of the coop, returning 31% in September 2005, its first full month of operations.
Coleman can invest this way because of both the fund's smallness and its newness. In fact, newly minted funds often stand out early in their existence, a phenomenon known as the new-fund effect. New funds are usually small, which allows the manager to take big positions (as a percentage of the portfolio) or to unload major holdings without roiling share prices. Moreover, managers of new funds don't have to deal with the baggage of old portfolios. They don't have emotional attachments to long-time holdings that may have performed well in the past but may not have such bright futures, and they don't have to worry about the tax consequences of selling a stock. Finally, managers of new funds may be driven to generate good returns in the first 12 months because strong initial performance often attracts assets.
Coleman invests in stocks of large companies that he views as having strong growth potential. He analyzes earnings reports and listens to conference calls, but doesn't meet with company executives. Coleman, who has one research analyst, says he re-evaluates the portfolio at the end of each year. He says that companies he judges to have the best potential for growth over the next year fill out the top slots in the fund.
Coleman, 50, is no rookie manager. He started his small St. Louis firm, Daedalus Capital, in 1994 and it has $7 million under management. Before that, he was a portfolio manager for Prudential Securities for four years. He says that private accounts that use a strategy similar to that of Chicken Little Growth returned an annualized 13% over the past ten years through June 30 (over that period, the average large-company growth fund returned an annualized 6%).
Clearly, the past year has been kind to Coleman, his approach and his selections. But if any of his top stocks miss the mark, Chicken Little will crater. So it hardly seems like an appropriate choice for the kind of investors for whom it was supposedly designed. On top of that, the fund sports a whopping 3% expense ratio (which, granted, could come down if assets rise significantly). In short, investors worried about the sky falling can easily find less risky, less expensive funds than Chicken Little Growth.