SAN FRANCISCO – On the cluttered map of the mutual-fund world, they are the blue highways — the roads less traveled. These are undiscovered, high-quality offerings with veteran management and strong results, and you can find them off the beaten path — if you know where to look.
The search begins with asset size — or rather, lack of it. Little-known funds naturally haven't attracted a lot of money. And flying far under the radar gives fund managers greater flexibility and independence — two main aspects of the job.
Focusing on standout portfolios with less than $250 million under management is a good starting point, and at least a couple of hundred funds make that cut.
After size, focus on funds with reasonable expenses and diversified portfolios. Past performance is a consideration, but how a fund manager generated returns is more important. Did the fund target hot sectors? Was the portfolio turnover rate excessive? Discipline and consistency are key.
"Anytime you can get a fund with a sound strategy, small assets and low costs, good things are likely to happen," said Russel Kinnel, director of mutual fund research at Morningstar Inc., the investment-research firm.
Which funds are roadside attractions today? Many market guides point to growth funds, especially those owning large-capitalization growth stocks.
"Large growth is a place to be," said Jim Peterson, a vice president at the Schwab Center for Investment Research. Large-cap stocks tend to outperform as market recoveries mature, he noted, and the biggest companies in the sector typically perform best.
Click here to watch interview with Schwab's Jim Peterson
Investors can also steer towards midcap and international small-cap offerings, Peterson said.
"You want to be diversified, and midcap is often a market that's overlooked," he added. "Overlooked," however, doesn't apply to international small-cap funds, many of which have closed to new investors in the wake of heady returns.
Peterson favors funds that are contenders not by being the top performer, but for staying true to a style and keeping expenses low.
Among large-stock choices, one of Peterson's favorites is Sit Large Cap Growth Fund (SNIGX) , a $98 million no-load portfolio with veteran investor Eugene Sit and three other co-managers at the helm.
The fund rose 12.7% in the 12 months through Wednesday, about 5.5 percentage points better than its Standard & Poor's 500 Index (SPX) benchmark and in the top 33% of its peers, according to Morningstar. Its three-year annualized 18.8% average gain lands it among the top 25% of its class. Peterson said he also likes the Sit fund's expenses of 1%, well-below the category's 1.53% average.
And if the biggest U.S. stocks are ready for a comeback, Sit Large Cap Growth is poised opportunistically, with almost 60% of assets in shares of giants like biotech leader Amgen Inc. (AMGN) and retailer Target Corp. (TGT)
Another noteworthy large-growth offering, which emerged on a Morningstar fund screen, is ABN AMRO/Veredus Select Growth Fund (AVSGX) , with assets of just $22 million.
Three managers run this no-load fund, which rose 11.1% for the past 12 months — near the middle of the pack. Its 22.9% average three-year gain puts it in the top 4% of its peers.
Co-manager Tony Weber said the team pays attention to disparities between corporate earnings and Wall Street analysts estimates.
"The catalytic driver behind stock-price movement is earnings surprise and the subsequent [analyst] revision of that surprise," Weber said. The strategy leads the fund managers to overweight companies in controversial areas like homebuilder KB Home (KBH) and discount carrier Southwest Airlines Co. (LUV). "We're going to go where the revisions are greatest," Weber said.
A midcap choice on Peterson's list is IMS Capital Value Fund (IMSCX) , with assets of $133 million. Also no-load, the fund gained 15.7% in the past 12 months, and its 27.7% three-year average gain equates to the top 13% of its midcap-blend category, Morningstar reports.
While the IMS fund's 1.50% expense ratio is slightly above the category's 1.47% average, "we're happy with how this fund has performed," Peterson said.
At Morningstar, a new "Analyst Pick" in the midcap space is Schneider Value Fund (SCMLX) , with $62 million in assets. Manager Arnie Schneider III handled investments at respected Wellington Management before starting his own shop a decade ago.
Though Schneider Value has a stiff $20,000 investment minimum, "you have someone from one of the best asset managers around, and in his funds and separate accounts has done a very good job," Morningstar's Kinnel said of the fund's manager.
"It's clear he's entirely interested and focused on managing a modest sum of money well rather than managing a huge sum of money adequately," Kinnel added.
Schneider Value has struggled in the past 12 months, gaining 8.7% and lagging 77% of its peers. But its 32.2% three-year annualized return is in the top 5% of its midcap value peers, and its 0.85% expense ratio is cheaper than the category's 1.48% average.
Said Kinnel: "That's the kind of fund we get excited about — really good management with small assets and low expenses."
International small-cap is an area where analyst research is limited but investor attention is high. Many of the best funds no longer accept new accounts, which makes Forward International Small Companies (PISRX) particularly attractive.
A team of small-cap specialists at Pictet International Management, an affiliate of an old-line Swiss bank, runs this $249 million portfolio. The no-load fund rose 31.8% in the past 12 months, and its 41.3% average three-year gain is in the top 19% of its foreign small/mid growth class, according to Morningstar.
Both Schwab's Peterson and Morningstar fund analyst Kai Wiecking are drawn to the Forward fund in part for its strong returns and reluctance to chase the hottest stocks.
"It's a solid fund, and they've achieved a fairly good record in recent years without having much exposure to emerging markets," Wiecking said.
Five funds off the beaten track:
|Fund||Ticker||1 Year Return||3-Year Annualized Return||Total Net Assets ($MM)||Expense Ratio||Minimum Initial Investment|
|Sit Large Cap Growth||(SNIGX)||12.7%||18.8%||98||1.00%||$5,000|
|ABN AMRO/Veredus Select Growth||(AVSGX)||11.1||22.9||22||1.30||$2,500|
|IMS Capital Value||(IMSCX)||15.7||27.7||133||1.50||$5,000|
|Forward International Small Co||(PISRX)||31.8||41.3||249||1.46||$2,500|
Source: Morningstar Inc. (Data as of 2/8/06)
Copyright (c) 2006 MarketWatch, Inc.