Funds: Grand Reopenings
The fund world buzzed when the Fidelity Magellan Fund (FMAGX), at $45 billion, recently reopened to investors after a 10-year hiatus. Lost in the noise was the sound of many other smaller funds also throwing open their doors—funds led by managers who don't get the press coverage Magellan's Harry Lange does but who are also widely respected in money-management circles.
Many of the funds focus on smaller-cap stocks, a category that ended a seven-year winning streak in 2007. The Russell 2000 Index is down 18.8% from its July, 2007, high, and the sector continues to suffer as institutional investors rotate into what they view as more reasonably priced and less economically sensitive larger-cap stocks. The drop in assets is a driving force behind the reopenings, as managers seek cash to meet redemptions and avoid selling holdings before they want to. Which raises the question: If the big money's getting out, why would anyone want to get in now?
To gain a toehold in selected funds with best-in-class, battle-hardened managers, that's why. Staking a small claim now means that when the sector starts to recover, you won't be locked out when funds inevitably close again. Existing shareholders usually can add money in a fund closed to new money.
One fund well suited to tough economic times is the $380million FMI Common Stock Fund (FMIMX). It's among the least volatile in the mid-cap blend category, and co-manager Ted Kellner remains focused on companies with strong balance sheets and steady cash flows. During the last three-year bear market, the fund had one down year, losing 6% in 2002. Kellner is buying stocks he thinks have been unduly hurt by economic nervousness, such as Beacon Roofing Supply and employee staffing company Korn/Ferry International (KFY).
Another recently reopened fund whose manager is a stickler for strong balance sheets is the $561million Royce Special Equity (RSQCX). Westport Select Cap, a mid-cap blend fund run by the same managers for more than a decade, has also held up well in downturns. Its buy-and-hold managers like stocks at low price-earnings ratios but also dip into areas of higher growth such as health care (it's 17% of the fund).
More notable may be the reopening of the $523 million Wasatch Small Cap Value Fund. Wasatch has a history of closing funds before they get too big, and its 14.7% 10-year return is one of the best of all small-cap funds. At 1.69% of assets, it also has one of the higher expense ratios. (The average is 1.3%.) Wasatch says the expenses are a result of its deep analytical bench and willingness to close funds, which means expenses are spread across fewer assets.
Instead of being dismayed about the small-cap sector's downturn, Wasatch fund manager Jim Larkins says he's excited. Larkins, who has a significant amount of his liquid net worth in his fund, says it's times like these when he finds great companies abandoned by investors. One company he likes is beaten-up commercial mortgage REIT NorthStar Realty Finance. The REIT has an 18% dividend yield. "The company has virtually zero credit problems yet has been tarred with the same brush as every other financial firm," Larkins says.