Mutual Funds

Bear Market Bonus: 7 Great Funds Reopen

With fewer assets, funds that were previously shut are now clamoring for your business.

By Thomas M. Anderson, Associate Editor

From Kiplinger's Personal Finance magazine, September 2009

Investors are once again investing, and that means they've rediscovered stock funds. After pulling some $285 billion out of stock funds from November 2007 through March 2009, they added $42 billion from April through June. This kind of behavior isn't surprising.

Investors tend to jump ship during bad times and pile back into stock funds when markets crackle. And stocks have performed exceedingly well since bottoming on March 9. From that date through June 30, Standard & Poor's 500-stock index returned 37%, while the MSCI EAFE index, a measure of stocks in developed foreign markets, jumped 46%.

The bear market inflicted plenty of pain, but it did come with one benefit. Since January 2008, more than 170 funds that had previously closed to new investors because they attracted too much money to operate efficiently have reopened to new clients. Among this crowd, you can find many solid funds that buy small-company and foreign stocks, as well as a few that specialize in large-company stocks.

Just because a fund reopens doesn't make it an automatic buy. To identify the most alluring of the comeback kids, we looked for funds with the right combination of below-average expenses, seasoned managers and records of consistently beating their peers over the long term. Eleven funds fit the bill. We profile seven of them; we previously added the other four to the Kiplinger 25 (see More Stellar Funds Reopen).

Neuberger Berman Genesis (symbol NBGNX) has delivered solid results by taking a flexible approach toward small-company stocks. Judy Vale and Bob D'Alelio, who lead the fund's four-person team, start by assessing the economic climate, then pick stocks they think will flourish in that environment. Currently, the fund is tilted toward stocks of companies in the health-care, defense and energy industries. That's because the managers see demand in these areas remaining strong regardless of how the U.S. economy performs. Beyond their big-picture analysis, the managers look for niche players that generate plenty of cash and have strong balance sheets.

The team especially likes hard-to-classify companies that Vale calls "steady Eddies." For instance, the AptarGroup (ATR), one of the fund's ten biggest holdings, makes specialized packaging for the food and drug industries and has a division that makes perfume. "A little over 13% of the portfolio is in steady Eddies," says Vale, who has managed Genesis for more than 15 years. Other holdings include Church & Dwight (CHD), the maker of Arm & Hammer baking soda, and Matthews International (MATW), a casket manufacturer.

The fund's quirky investments haven't harmed returns. Over the past decade, Genesis has trounced the typical small-company fund by an average of seven percentage points per year.

Hands-on approach

The folks at Century Small Cap Select (CSMVX) stay in close touch with the companies whose shares they own or are contemplating owning. Managers Lanny Thorndike and Kevin Callahan, along with a team of analysts, expect to meet with rank-and-file workers as well as executives from at least 80 companies this year. They also speak with a company's competitors, suppliers and customers. "With so much uncertainty about next year's earnings, this is the time meeting with companies really matters," says Thorndike.

Thorndike, who has run the fund since its inception in December 1999, says he and Callahan look for firms that are consistently profitable. To them, that means companies with an average return on equity (a measure of profitability) of 15% over rolling three-year and five-year periods. They also favor companies with the potential to double their book value (assets minus liabilities) over five years.

Despite the stock market's recent rebound, Thorndike still sees plenty to like. "About twice a decade you get the opportunity to buy leaders at laggard valuations," he says. Technology names -- such as Polycom (PLCM), a producer of teleconferencing equipment, and Websense (WBSN), a maker of Web-filtering software -- are among the fund's top holdings.

Century Small Cap's long-term record is superb. From its start through June 30, the fund returned an annualized 8%, beating its category by an average of nine percentage points per year. "We're aiming more for singles and doubles rather than trying to buy a stock that is going to go up 100% or more in one year," Thorndike says.

Sleep-tight investor

Like his mentor, the redoubtable Marty Whitman, Curtis Jensen says he searches for stocks that are "safe and cheap." On the price side of the ledger, Jensen, manager of Third Avenue Small-Cap Value (TASCX), buys a stock only if it trades at a discount of at least 50% to what he thinks the company is worth. As for safety, he prefers financially strong companies with veteran management teams. "When it comes to investing in stocks, having a fortress-like balance sheet is critical for our sleep-at-night factor," Jensen says. Examples of stocks that meet his criteria: Cimarex Energy (XEC), a Denver-based oil-and-gas exploration company, and Electronics for Imaging (EFII), a manufacturer of components and software for printers.

Jensen recently had about 60 stocks in his portfolio. "The fund is more concentrated today than it has been in quite some time," he says. "We would rather spend more time on fewer things than try to protect ourselves by wildly diversifying."

Tucked inside the fund is a slug of distressed debt. Jensen thinks the debt of companies on the verge of or in bankruptcy can produce returns similar to those for stocks, but with less risk than stocks. If a bond's issuer goes into bankruptcy, the debt is usually converted into stock. As of April 30, Third Avenue had about 5% of its assets in distressed debt, including MBIA, a bond insurer; W&T Offshore, an energy producer; and trucker Swift Transportation.

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