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Fund Watch


Low-Minimum Mutual Funds From the Wizards of Wall Street

Nellie S. Huang

Four top-notch managers who have historically required big bucks to open accounts now offer mutual funds with modest minimums.



A cool $1 million. that's the typical price of admission for access to the real wizards of Wall Street. You’ve no doubt heard whispers about these investment advisers. They cater to the rich and boast track records that leave the broader market in the dust. Some have earned double-digit annualized returns for decades. The stumbling block, of course, is that high minimum, right?

SEE ALSO: Our Guide to Mutual Funds

Wrong. A few chart-topping advisers also manage mutual funds with much lower minimums -- think $1,000 to $5,000. Some of the funds have been around for a few years but still fly under most investors' radar. Others are too new to judge. What you don't see (because financial regulations prevent it) is that in some cases, the advisers behind these funds have stellar long-term records managing private accounts.

We've uncovered the best of these unsung fund managers. All have honed successful strategies investing for the 1% -- wealthy families and institutions -- and are bringing those approaches to mutual funds with minimums that the 99% can handle.

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Just another account

Wedgewood Partners, a St. Louis investment firm, has made a lot of money for its clients over the years. A composite of the firm's stock accounts boasts a 10-year annualized return of 12.0%, after fees, beating Standard & Poor's 500-stock index by an average of 5.3 percentage points per year through September 2012. And the ride has been fairly consistent: In 11 of the past 15 calendar years, the average account has outpaced the benchmark.

Once, you had to be rich to invest with Wedgewood. The firm required a $1 million minimum if you walked in off the street. But that changed in 2010, when Wedgewood launched Riverpark/Wedgewood (symbol RWGFX), a mutual fund with a $1,000 minimum. The investment strategy for the fund is the same as for its private accounts -- to buy large, undervalued companies with strong three- to five-year growth prospects. "The mutual fund is just another account in the composite," says David Rolfe, manager of Riverpark/Wedgewood. Since the fund's September 2010 launch, it has earned an annualized 16.1% return, an average of 2.9 percentage points better than the S&P 500 per year (unless otherwise indicated, all returns are through November 2).

Rolfe and his partners on the firm's investment team -- Anthony Guerrerio, Dana Webb and Michael Quigley -- believe the best way to beat an index is to create a portfolio that looks nothing like it. So instead of investing in 500 large-company stocks (essentially what you get with the S&P 500), Wedgewood holds just 20. "We make fewer but better decisions," says Rolfe. "Every stock matters." The investment team looks for, among other things, companies that can double earnings over three to five years and currently sell at a discount to book value (assets minus liabilities).

The approach has led Rolfe to the same names that many large-company fund managers own: Apple, Berkshire Hathaway, Google and Express Scripts, to name a few. But Riverpark/Wedgewood returned 21.0% over the past year, beating the typical large-company growth fund by 9.1 points.

Rolfe says his secret is keeping calm when the market gets rough. "Temperament far outweighs IQ in this business," he says. He's willing to wait a long time to buy stocks at the right price. But with a 20-stock portfolio, "if we add a new name, we have to sell something." Sometimes, valuation forces his hand. Rolfe sold Intuitive Surgical in mid 2012 because it got too expensive. The tougher call to make is when the company's growth prospects have changed, either because of competition or because of a fundamental change in the business model. That happened with Countrywide Financial in 2005, when, Rolfe says, the company substantially loosened its underwriting process and went from selling "mom-and-pop, bread-and-butter mortgages to an exotic line of mortgages." Rolfe says Riverpark/Wedgewood's average annual turnover ratio is 25%, which means stocks typically stay in the fund for about four years.

One stock recently added to the portfolio is Coach. Rolfe says he watched the luxury leather-goods business for years, waiting for its share price to come down. He pounced last June, when the stock fell to $60 from an all-time high of $78 in March after sales slowed in North America. "We hoped it would miss the next quarterly earnings target, and it did," Rolfe says.

The focus is stock picking

From its launch in 1996, Vanguard Selected Value (VASVX) has been run by managers who work for Barrow, Hanley, Mewhinney & Strauss, a Dallas firm. But in May 2005, Donald Smith and Richard Greenberg, of Donald Smith & Co., a New York City investment firm, signed on to manage the fund's new inflows. The pair now manage about $1 billion for Selected Value, or about 25% of the fund's total assets. (Barrow manages the rest.)

Never heard of Donald Smith & Co.? That's not surprising. The firm, which manages $4 billion, doesn't advertise. "We don't believe in it," says Smith, the firm's founder. Instead, it prefers to focus on picking stocks, which it does quite well. Over the past ten years through September 2012, the firm's typical account returned 12.2% annualized, says Smith, compared with the S&P 500's annualized return of 8.0%.

Smith and Greenberg are value investors, but their definition of a bargain hinges on a single number: price to tangible book value. Tangible book value starts with book value, but it subtracts harder-to-value assets, such as goodwill, leases, franchises, and export and import permits.

For Selected Value, Smith and Greenberg home in on midsize com­panies that have market capitalizations of $2 billion to $10 billion and are in the bottom 10% of that universe in terms of price to tangible book value. The managers then dig deeper, analyzing potential earnings growth, return on equity (a measure of profitability) and cash flow. The research generates a portfolio of 22 stocks that sell at an average of 0.8 times tangible book value. By contrast, says Smith, the S&P 500 sells at 4 times tangible book value.

Lately, Smith and Greenberg have favored insurance companies. In 2012, they picked up more shares of reinsurance company XL Group when they were selling at 70% of tangible book value. Surprisingly, Smith and Greenberg consider airlines attractive as well. Greenberg says they are putting their money on carriers, such as JetBlue and Southwest, that don't face the pension liabilities that weigh on the bigger airlines.

Smith and Greenberg won't say how their portion of Selected Value has fared since they got the business in May 2005. But over that time, the fund as a whole has gained 5.7% annualized, 0.5 point per year better than the typical midsize-company value fund.

A go-anywhere strategy

Pekin Singer Strauss, a 22-year-old Chicago investment firm with $900 million under management, proves that size doesn't matter. From 2000 through 2010, the stock portfolios it manages for wealthy families and individuals returned an average of 6.0% after fees. By contrast, the S&P 500 gained a piddling 0.4% annualized over the same period. "We had a great track record, but nobody knew about us except our clients," says Adam Strauss, who joined the firm in 2004.

So in 2006, Pekin Singer Strauss launched a mutual fund. Appleseed Fund (APPLX) isn't an exact copy of the separate accounts that the firm runs for its wealthy clients. The go-anywhere mutual fund holds more in foreign stocks (45% of the fund's assets at last report). Appleseed also has a higher exposure to small companies (13% of assets). And the fund screens out companies that have anything to do with alcohol, tobacco, gambling, weaponry or pornography; many of Pekin Singer Strauss's separate accounts do not.

But the investment process for the fund is the same as it is for the separate accounts. The fund's man­agers -- Rick Singer, Billy Pekin, Ron Strauss, Adam Strauss and Josh Strauss -- look for companies with strong balance sheets and good returns on capital. And they'll consider com­panies of any size, from so-called micro caps to giants. Before the fund adds a new stock, at least four of its five partners must approve, and the stock must trade at a 50% discount to what the team thinks the business is worth. "We're disciplined on price," says Adam Strauss. "It reduces the losses when we do make a mistake." They're methodical about selling stocks, too. "When a stock hits our estimate of intrinsic value, we sell," Strauss says.

The process saved Appleseed in 2008, when the firm's litmus tests weeded out companies with excessive debt as well as high exposure to the housing industry. The fund lost 18.1% in 2008, a relatively strong performance in a year in which the S&P 500 plunged 37%.

In search of rising payouts

Davenport & Co. is a 149-year-old Richmond, Va., investment company with offices throughout Virginia, North Carolina and Maryland. The firm dipped its toe into the mutual fund business after managing the company's profit-sharing plan with some success. "The idea was to manage clients' money the same way we manage our own," says George Smith, a member of Davenport's seven-man investment team. Davenport Core (DAVPX), the firm's first fund, launched in 1998. Over the past ten years, the fund returned 7.1% annualized. That squeezed it past the S&P 500 by an average of 0.4 point per year.

Then came Davenport Value & Income (DVIPX). The fund, which mostly invests in large, dividend-paying companies, is just two years old. But the team behind it -- John Ackerly, Michael Beall, Trigg Brown, William Noftsinger, Lee Chapman, Robert Giles and Smith -- has managed a similar strategy for Davenport clients (as well as the firm's profit-sharing plan) since 2001. That account has outpaced the S&P 500 over "the majority" of the past ten calendar years, says Smith. The mutual fund is doing well so far: From its December 2010 inception, Value & Income earned an annualized 12.0%, an average of 3.2 points per year better than the S&P 500.

The managers look for undervalued companies that have the potential to increase their dividends regularly. That leads the team toward blue-chip dividend all-stars, such as Coca-Cola, Johnson & Johnson and McDonald's. Also included are stocks that are temporarily out of favor, as well as higher-yielding stocks, such as real estate investment trusts and utilities. The fund yields 2.1%.

You won't find Value & Income at a fund supermarket, such as the ones sponsored by Schwab and Fidelity. But you can buy shares directly by calling 800-281-3217.


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