If you want to beat the stock market, you won't succeed with a managed fund that looks and quacks like an index and charges an annual fee of 1% or higher. That unfortunately fits the description of all too many mutual funds these days, run by managers often referred to in the industry as "closet indexers." If you're lucky, these funds will match the performance of the relevant index after fees -- and the managers will grow rich.
One way to beat the indexes is to find talented, idiosyncratic managers -- like Peter Doyle and Murray Stahl of Kinetics Paradigm. Their all-cap, go-anywhere fund (symbol WWNPX) will never look like any index or fit neatly into an investment style box. From the fund's inception on December 31, 1999, through May 31, 2007, Paradigm returned 16% annualized, compared with 2% annualized for Standard & Poor's 500-index -- and it's handily beaten the S&P every year.
The Paradigm managers look for five characteristics when they select stocks for this low-turnover fund. Christopher Bell, Kinetics' senior vice-president for sales and marketing, says the managers want firms that they expect will produce a return on equity of at least 15% over the next three to five years; that make products that have long lifecycles and can be profitably altered or expanded to serve different markets; and that benefit from high barriers to market entry and innovative management.
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For example, Doyle and Stahl like the publicly traded stock exchanges around the globe. The exchanges enjoy near-monopoly positions, technological innovation and rapidly expanding trading volumes. Do Doyle and Stahl like the NYSE or Nasdaq or the Singapore Exchange best? They own them all -- all 23 listed exchanges around the world. Similarly, asset managers such as Franklin Resources and Eaton Vance have a wonderful business model. These companies make good money even when the holders of their mutual funds don't do so well. Bell says Paradigm holds all 14 listed diversified asset managers in the U.S. (soon to shrink to 13 because Nuveen is being acquired).
Like other value managers, the Paradigm team likes the shares of Canadian oil sands companies. The reserves are long-lived and highly profitable at today's oil prices. Do they prefer Suncor Energy or Canadian Oil Sands Trust? They own 'em all -- 15 of them. As Bell says, the managers like to create horizontal monopoly positions: If one securities exchange loses a trade to another, or a Canadian oil company cedes a barrel to a competitor, they're all in the Kinetics portfolio.
If you're happiest with a fund that fits cleanly into a style box such as large-cap value, then Kinetics Paradigm isn't for you. But if you want your stocks picked by some original, imaginative investors, then this could be a spicy addition to your portfolio. Annual expenses are a fairly steep 1.74%; the investment minimum is $2,500.
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