Al Frank Fund: Long-Term Winner

You wouldn't think that a paint-on-the-wall approach would make a good investment strategy. But the Al Frank fund uses just that -- buying broad swaths of cheap stocks and sitting on them. It's a tack that's worked well. The fund has more than tripled the market's gains over its ten-year history.

The fund (symbol VALUX) follows the strategy pioneered by the late Al Frank, founder of The Prudent Speculator newsletter. Prudent Speculator has been the best-performing investment letter over the past 15, 20 and 25 years, according to the Hulbert Financial Digest.

Frank died in 2002, but his firm's letter, funds and private accounts have continued to perform well under the stewardship of John Buckingham. Buckingham joined Al Frank Asset Management as a college senior in 1987, and began playing a significant role in making investment decisions after Frank entered semi-retirement in 1990.

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Picking stocks is a simple numbers game at the Al Frank shop. Buckingham and co-manager Jessica Chiaverini run screens on all stocks that trade on U.S. exchanges, including American Depositary Receipts of foreign companies. By screening for low price-to-book value and price-to-sales ratios, they come up with a list of about 1,300 cheap stocks that the managers and the firm's three researchers watch closely.

From that point, it's a matter of number crunching and waiting. Looking at projected growth rates, Wall Street earnings estimates and companies' historical price-earnings ratios, the team comes up with three- to five-year price targets for each of those 1,300 stocks.

When a stock trades at half or less of its target price, the newsletter rates it a buy. If the Al Frank fund holds cash, Buckingham will use it to add such a stock to the portfolio. Buckingham will sell a stock if it reaches his price target, although portfolio turnover is miniscule.

Buckingham thinks of himself as more farmer than painter. "You have to plant a lot of seeds," he says. The fund recently had its $201 million in assets spread among almost 300 stocks. Buckingham likes to own a handful of companies in any sector that the fund holds. "You want to have Goldman Sachs and Bear Stearns, not just Bear Stearns," he says.

Given the fund's large number of small bets, you'd expect Al Frank fund to act a lot more like an index fund than it has. Because the fund can invest in just about any type of stock, it's tough to compare it with a single benchmark.

But over its nine full calendar years of existence, Al Frank has suffered only one down year, compared with three apiece for Standard & Poor's 500-stock index and the Russell 2000 small-company index. From its 1998 inception through May 1, the fund gained 13.3% annualized, compared with 5.1% for the S&P 500 and 6.2% for the Russell 2000.

The past year has been a difficult one, though. The fund has lost 11.0%, matching the Russell 2000 but trailing the S&P by six percentage points.

Based on the large number of bargains showing up on his screens, Buckingham is upbeat about the stock market. In the past, he says, the market struggled when his buy list was small and rallied when the list was long -- today, it contains more than 200 stocks. "I am optimistic given the tremendous number of stocks on our buy list," he says.

The numbers are also telling Buckingham where not to put more money. "As some of the energy and agriculture stocks have appreciated significantly we've been taking money off the table," he says.

If you want to invest with a manager who knows his portfolio's holdings inside and out, Al Frank isn't for you. But the fund's long-term results are impressive and some investors might find this well-diversified package appealing. The fund carries an above-average expense ratio of 1.49%.