Three Nice and Unfamiliar No-Loads


Three Nice and Unfamiliar No-Loads

In a final dispatch from Morningstar's annual conference, our writer reports on three interesting and often overlooked no-load stock funds.

Looking for the next Bill Miller? It would be great to discover relatively undiscovered managers before they get swamped with money to invest. Morningstar identifies these three no-load funds and their managers as outstanding: Scott Brayman of Champlain Small Company Advantage (symbol CIPSX), Tom Putnam and Paul Hogan of FAM Equity-Income (FAMEX) and Derwood Chase and David Scott of Chase Growth (CHASX).

The funds aren't brand new -- the Champlain fund dates to 2004 and the others were organized in the mid 1990s. They generally avoid the headlines and the limelight, however, so they aren't at all bloated. Each generally outperforms Standard Poor's 500-stock index across most measuring periods. Expenses are reasonable for funds sponsored by small, independent shops.

Brayman, more than anything, doesn't want to have a any of his stocks blow apart. "The key to wealth creation is avoiding large losses," Brayman says. He started Champlain Small Company after he left Sentinel Small Company (SAGWX), a load fund, in 2004. From 1996 to 2004, Sentinel ranked in the top 25% of funds that invest in small-company stocks. Brayman tries to manage risk by buying stocks of companies he regards as having stable cash flow and superior growth prospects relative to others in their industry. He makes many of his buys when the stock's price is less than what he considers the company's "intrinsic fair value." To stay out of trouble -- he calls it controlling the risk of hubris -- Brayman targets companies only in sectors he and his team think they understand. The fund has $47 million in assets and has returned 10% in the past year. Expenses are 1.4%.

Tom Putnam and Paul Hogan stick to what they know when running FAM Equity-Income. They don't try to predict the market or study big-picture economic trends. "We do think we know how to understand businesses and how to evaluate them," Putnam says. "We are looking at businesses, we are not looking at stocks." Generally, that means five conditions: Putnam and Hogan must understand the business. The company has to have strong cash flow. Putnam and Hogan must have access to company management. The shares must trade at a discount to what the managers think the company would be worth if sold or broken up. And finally, the company must pay a dividend. Putnam likes dividends because he thinks it forces the management to be disciplined. This process shuts out technology stocks. The fund also missed the rally in energy and utilities. Still, FAM Equity-Income has returned an annualized 10% over the past ten years. It has $160 million in assets. Expenses are 1.26%.


At Chase Growth, Derwood Chase, the founder of the sponsoring investment company, and lead manager David Scott use quantitative screens to whittle thousands of possible investments to a few hundred. "Ultimately, we turn the computers off and turn the finalists over to our analysts to kick the tires to see if the quantitative information is accurate," Chase says. He wants to find the factors that drive earnings growth to see if they will hold out into the future. The managers then select growth stocks that are selling at reasonable prices. The fund's portfolio is concentrated in 35 to 45 stocks. Chase Growth has $641 million in assets and expenses of 1.18%. Since its inception in 1997, it has an annualized return of 8%.