Mutual Funds

Comeback of the Young Century

After years of producing miserable results, Bruce Fund is shining like a star.

By Ilana Polyak

From Kiplinger's Personal Finance magazine, September 2004

Do you know the name of the top-performing U.S. stock fund for the past three years? Probably not. Bruce Fund has just $15 million in assets and only 450 shareholders -- and it isn't even big enough to get a ticker symbol. This is the same Bruce Fund that was once so horribly inconsistent that we inducted it into our Mutual Fund Hall of Shame in 1992. The fund's inconsistency persisted for the rest of the decade.

But since 2000, when the technology-stock bubble began to deflate, this contrarian fund has been a consistent standout. In each of the past four calendar years (and so far in 2004), Bruce has landed in the top 10% of all diversified domestic stock funds. Over the past five years, the fund ranks fourth in that group, with an annualized return of 27%, compared with 1% for the category average. Its three-year annualized return is 36%, compared with less than 1% for the average stock fund.

What's changed? Nothing, really.

Pessimistic view

For much of the fund's 22-year existence, co-managers Robert Bruce, 72, and son Jeff, 44, have been bearish on stocks. For years they've maintained a sizable holding of bonds, believing that stocks were overvalued. By 1999, when everyone else was bullish, three-fourths of the fund's assets were in zero-coupon bonds. "It's been a struggle for us," the elder Bruce says.

But everything began to fall into place for the Bruces starting in 2000. As interest rates fell, those volatile zeros shot up in value. The fund also scored big with some obscure stock picks. A case in point: Amerco, the parent company of U-Haul vans, which had been in bankruptcy. "A lot of people don't invest in bankrupt companies," says Robert. "But we bought the stock because we knew the company. We'd been watching it for years." He and Jeff liked Amerco's $900 million in real estate holdings -- far in excess of what the company owed to creditors. The Bruces bought the bulk of their shares at $1.81 last November. The stock recently fetched $24.

Another winner is Elan Corp., an Irish biotech outfit. The company's numerous partnerships led to an accounting mess in 2003. But now investors are again focusing on Elan's multiple-sclerosis and Alzheimer's drugs. The stock has tripled in 2004.

The fund's biggest holding, America Service Group, a provider of health-care services to prisons, fell drastically in 2001 when the company let its contracts lapse. Contracts have since been renegotiated on more favorable terms, and the stock rose 18% in the first six months of 2004.

Jeff says that he and his father do their own research, specializing in down-and-out and neglected companies. "If distressed convertible stocks or high-yield bonds offer the best potential reward, we'll go there," he says.

As they so often are, the Bruces are skeptical about stocks at the moment. "We've had a substantial run in prices, and the best buying opportunities are behind us," says Jeff. While other managers have been repositioning their portfolios for interest-rate increases, the Bruces think rates will stay low because of what they perceive as economic weakness. As a result, almost half of their fund's assets remain in bonds, including zero-coupon issues.

Out of sync

The Bruces' penchant for cheap, small-company stocks plays well in a market slump but doesn't tend to pan out in markets that favor blue chips. In 1998 and 1999, when fast-growing, large-company stocks predominated and the stock market was soaring, the fund lost 6% and 20%, respectively. Today, the substantial bond stake is reason for caution.

You can invest in the fund (800-872-7823) in only ten states -- California, Colorado, Florida, Georgia, Illinois, Indiana, Nevada, New Jersey, New York and Wisconsin. Despite its recent success, Bruce Fund seems best suited to those investors who are down on stocks and the economy.

--Reporter: Jessica Anderson

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