The Mysterious Oceanstone Fund

This fund's performance has been impressive, but its manager's silence makes it hard to recommend.

Talk about a riddle wrapped inside an enigma. Oceanstone Fund (symbol OSFDX (opens in new tab)) has delivered awesome gains in recent years, but scant information exists about its close-lipped manager, James Wang, and his methods. And that apparently is by design.

Wang declined to speak with us for this article. Before we tell you what we do know about him, let's review those mind-boggling results. Over the past five years through April 17, Oceanstone returned 39.9% annualized, annihilating Standard & Poor's 500-stock index by an average of 39 percentage points per year. Starting in 2007, the fund's first full year of existence, and including 2012, Oceanstone has topped the index every year except last year, when its 1% return lagged the index by a mere percentage point.

Most of Oceanstone's great performance is due to two great quarters and one great year. The disastrous 2007-09 bear market ended on March 9, 2009, and stocks began to recover with a vengeance. The S&P 500 gained 16% in both the second and third quarter of that year. But Oceanstone blew away the index, soaring 134% in the second quarter and 54% in the third. Propelling performance were big positions in Dollar Thrifty (DTG (opens in new tab)), the car-rental company, which skyrocketed 1,103% in the second quarter, and Sonic Automotive (SAH (opens in new tab)), a car retailer, which jumped 535%. Oceanstone finished 2009 with a 264% gain, compared with 26% for the index.

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We know from the fund's prospectus and other records that Wang invests primarily in U.S. stocks and that he trades frequently and sometimes furiously. Oceanstone's portfolio turnover for the fiscal year that ended June 2011 was 146%. In previous years, turnover topped 400%, implying that Wang held stocks for less than three months, on average.

The prospectus says that Wang lives in Carlsbad, Ca. (just north of San Diego), and that he was a state-registered investment adviser from 2003 to 2006. During that time, the prospectus says, "he advised separately managed accounts in [the] U.S. stock market for individuals and small businesses."

Despite Oceanstone's amazing record, the fund holds only $23.4 million in assets. The most obvious explanation for Oceanstone's modest size is that it is not easy to buy. The fund, which requires a $2,000 minimum investment and does not levy sales charges, is not sold through brokers (online or otherwise). To invest, you have to obtain an application from the fund's Web site or its transfer agent (800-988-6290), fill it out and mail it. The fund's annual fees clock in at a pricey 1.80%.

Pam Tarczy, of Mutual Shareholder Services, the transfer agent, says it has never been Wang's "intention to grow a huge fund … so that it's unmanageable." She also says he attributes some of that spectacular 2009 return to luck, and that, ideally, he'd like to produce average returns of 15% a year. She also says he holds a PhD in biology (though Oceanstone held not a single health care stock at last report).

To add one more element to the mystery of Oceanstone, you can't pigeonhole Wang as someone who focuses on a particular segment of the stock market. Fund rater Morningstar labels Oceanstone as a small-company value fund, and it's likely that bargain-priced runts played a major role in Oceanstone's ascent. But as of December 31, according to Morningstar, 65% of the fund's stock holdings were in large and gigantic companies. After a 19% position in cash, Oceanstone's largest holdings were Bank of America (BAC (opens in new tab)), 11% of assets; Archer-Daniels Midland (ADM (opens in new tab)), 9%; Arrow Electronics (ARW (opens in new tab)), 8%; and General Motors (GM (opens in new tab)), 6%. All told, the fund held 18 stocks.

That Wang seeks to keep Oceanstone small and, therefore, easy to manage, is commendable. That will make it easier for a gunslinger like him to buy and sell stocks, especially when he trades shares of small companies, which can be illiquid. But without having the opportunity to speak with Wang and learn more about his philosophy and approach to stock picking, it's hard to endorse his fund. For now, Oceanstone is a mystery best left out of your portfolio.

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Bob Frick
Senior Editor, Kiplinger's Personal Finance