A Balanced Fund With Attitude

Editor's Note: This story has been updated since its original publication in the July 2011 issue of Kiplinger's Personal Finance magazine.

Villere Balanced fund isn't nearly as sedate as its name would suggest. A classic balanced fund owns a mix of bonds and stocks of well-known, dividend-paying companies. But Villere's four managers chase mostly undiscovered, fast-growing small and midsize companies. The companies must dominate their particular niche, have low debt and generate lots of cash.

The fund’s four managers look for fast-growing companies trading at favorable prices. They seek companies that are generating annual earnings growth of at least 18% and whose price-earnings ratios are below the growth rate. “The key for us is that the companies grow earnings in excess of our price-earnings ratio and we believe they still can for years,” says George Young, who runs the fund with George Villere, Sandy Villere II and Sandy Villere III.

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Although the strategy is classic GARP -- growth at a reasonable price -- the fund ends up with a portfolio that is more aggressive than those of most of its peers. In fact, over the past five years, it has been 38% more volatile than the average balanced fund. But that hasn’t hurt the fund’s shareholders. Over the past ten years through June 1, Villere Balanced (symbol VILLX) returned 6.3% annualized, beating its typical peer (Morningstar puts the fund in its moderate-allocation category) by an average of 2.4 percentage point per year and clobbering Standard & Poor’s 500-stock index by an average of 3.9 points per year. Over the past year, the fund soared 36.2%. That tops its rivals by an average of 17.5 points and the S&P 500 by 10.9 points.

Once the four New Orleans–based managers find a promising company, they meet with its executives and chat up competitors or suppliers, or both. When the fund invests in a small-capitalization stock (according to Morningstar, half of Villere’s stock holdings are in small firms), the fund sometimes becomes one of a company’s largest shareholders. That helps the managers gain access to company executives. “When we want to learn the story, we want to learn right from the horse’s mouth,” says Sandy Villere III.

Despite the heavy dose of small and midsize companies in the portfolio, the managers will invest anywhere they think they have found a good deal. Pop open the hood and you’ll find obscure firms such as 3D Systems, a maker of stereolithography printers, and Pool Corp., a distributor of swimming pool supplies, mixed in with familiar names such as Bank of America and FedEx. Villere Balanced owns only about 20 stocks, holding each for 2.5 years, on average.

On the bond side of the portfolio, Villere holds more corporate debt than most balanced funds. The managers generally favor single-A-rated bonds, although they like to hold 10% of the fund’s bond allotment in junk-rated issues. They generally keep the fund’s average maturity to about five years.

Villere ordinarily invests 70% of its assets in stocks and 30% in bonds. However, depending on how the managers feel about each asset class, bonds can fluctuate between 25% and 40% of the portfolio. The fund currently has only 25% in bonds because the managers fear that rising interest rates will lead to falling bond prices.