FUND WATCH


Flying Under the Radar

This small fund quietly puts up solid returns.



In the sprawling world of mutual funds, it's no surprise that some funds with admirable records remain overlooked for years. Usually this is because the sponsor has no interest in marketing the fund or doesn't have the financial wherewithal to do so.

Consider Croft-Leominster Value, a Baltimore-based fund with only $11 million in assets. The fund, which has been around since 1995, is managed by Gordon Croft, who spent 20 years as a portfolio manager at T. Rowe Price, and his son, Kent. The two founded Croft-Leominster in 1989 with a focus on private accounts-managing money for pension funds, endowments, foundations, and wealthy individuals. Today the firm manages $450 million. In addition to Value (symbol CLVFX; 800-551-0990), it also runs Croft-Leominster Income, a fund that specializes in bonds. Both are no-load.

Value can invest in firms of any size, though it recently had more than 60% of assets in large-company stocks. Croft-Leominster's strategy parallels that of many bargain hunters. The Crofts seek companies with solid operating histories, strong cash flows, and lower price-to-earnings ratios than the overall market. "When it's all said and done, we're the type of people who like to buy something at 80 cents on the dollar," says Kent Croft. "We have a hard time trying to identify the next Microsoft or Google. All we're really trying to do is grind out above-average returns with some cushion on the downside."

Indeed, the Crofts don't like to take huge risks. Earlier this year, they ratcheted up the fund's cash position to 15% because they couldn't find enough attractive opportunities. Lately, says Kent Croft, the fund has been putting some of that cash to work. The Crofts also recently reduced the fund's stake in energy stocks from 16% of assets to 10%. Most of the fund's energy holdings have been in companies that extract crude oil from western Canada's tar sands. Rather than invest in the largest players, the Crofts invested in a basket of smaller Canadian energy companies, such as OPTI Canada and UTS Energy. As the managers have trimmed the fund's energy holdings, they have lifted its exposure to health care stocks, investing in Dutch biotech Qiagen and respiratory care company Lincare, among others.

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The managers often gravitate to fallen companies they believe are poised for a rebound. As the Croft-Leominster Web site puts it: "Parts of our portfolios exhibit contrarian characteristics to help us avoid the sheep-like mentality that so often confines the thinking and originality of other managers." Holdings that fall into that category include scandal-tainted insurance giants Marsh McLennan and American International Group. "We're not very flashy, but we're not very conventional, either," says Kent Croft. "Something gets beat up and we tend to look at it -- that's the contrarian aspect to what we do."

Croft-Leominster's returns are solid. In seven of the past eight calendar years (including the first seven months of 2006), the fund ranked in the top 40% of funds that focus on large, undervalued companies. Over the past ten years through July 31, Value returned an annualized 10%, about one percentage point per year, on average, ahead of Standard Poor's 500-stock index. The fund's annual expense ratio is 1.50%, on par with its peers but no bargain. Still, the Crofts are experienced managers with a consistent strategy -- and Value is a fund worth keeping on your radar.




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