There are more than 6,000 mutual funds, but, hey, how many can you name? Chances are the ones you know are offered by giants such as Fidelity, T. Rowe Price (TROW ), and Vanguard.
The biggies have some fine funds, but excellence is not a matter of size. Scores of outstanding funds run by small investment management outfits fly below the radar. Ever heard of Keeley Small Cap Value (KSCVX )? What about Kinetics Paradigm? They’re both among our 24 winners of this year’s Standard&Poor’s/BusinessWeek Excellence in Fund Management Awards. “Year after year we unearth these tiny gems,” says Phil Edwards, S&P’s managing director of funds research. (Standard&Poor’s, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP ).)
To find our winners, we start with the 830 funds rated A or B+ in their categories for the five years ending on Dec. 31, 2006, in the BusinessWeek Mutual Fund Scoreboard (BW–Jan. 22). Our highest ratings don’t necessarily go to the funds that racked up the biggest numbers. What counts are the risk-adjusted returns.
To be considered for the award, a fund must have assets of at least $100 million, a manager with at least five years’ tenure, and a minimum investment of less than $26,000. It should also be open to new investors. Once a fund clears those hurdles, S&P analysts conduct in-depth, face-to-face interviews with managers to quiz them on investment practices.
In the four years since we started these awards, our Best Managers have lived up to their billing. The average stock fund finalist beat the Standard&Poor’s 500-stock index by 5.6 percentage points annually. (That’s two years of gangbuster stock fund performance, and two years when our stock funds were within a hair’s breadth of the index.) Among bonds, our finalists handily beat the Lehman Brothers Aggregate Bond Index in three of the four years.
On the pages that follow you’ll discover the secrets that made four of the smaller fund companies successful and a chart of all 24 finalists. For more information on the other 20, plus a slide show, free S&P reports, and updates on previous winners, go to BusinessWeek.com/extras.
KEELEY SMALL-CAP VALUE FUND
To John Keeley Jr., stockpicking is more than a job. It’s an obsession. “I have very few other interests, and I don’t even consider it work,” says the 66-year-old manager of the Keeley Small Cap Value Fund. “I intend to pass on to my eternal reward slumped over a Quotron terminal.” Thirty years after starting his own research firm and 14 years after the launch of his mutual fund, Keeley remains as excited as ever about finding overlooked and underappreciated investments. During the past 10 years his fund has outperformed the Standard&Poor’s 500-stock index by more than eight percentage points annually, on average.
Marketing isn’t Keeley’s forte, however, and his tiny business struggled in obscurity, despite his investment prowess. In 2002, almost 10 years after the fund opened, it had grown to just $65 million in assets, so Keeley decided to bring in one of his sons who’d worked in marketing at a brokerage firm. A second son, also with marketing experience, joined in 2005. The younger Keeleys started spreading the news, and made an extra effort to attend the trade shows that cater to investment advisers. Now the fund weighs in at $4 billion.
Keeley gets his edge by shopping for stocks in the inefficient corners of the market, particularly spin-offs, restructurings, and companies emerging from bankruptcy. Wall Street typically doesn’t follow such outfits or include them in indexes. So how does Keeley uncover these properties? “They’re pretty much in the newspaper,” he says. “But no one’s doing a lot of analysis on them, so it’s just a question of how hard you want to work on your own.”
Look at Chaparral Steel, spun off from concrete company Texas Industries (TXI ) in 2005. At the time, the stock, with a book value of $24, was trading for less than $15. Now it’s over $50. “It didn’t take a rocket scientist to figure out that could be a good situation,” Keeley says.
This spring will likely present a bevy of opportunities for deep-value investors. That’s because three big companies–Tyco International (TYC ), American Standard (ASD ), and Temple-Inland (TIN )–are splitting up divisions and spinning them off to shareholders. Keeley should have plenty to keep him at his desk.
KINETICS PARADIGM FUND
Unlike some of the other smaller fund companies on our list, Kinetics Asset Management is no stranger to the limelight. Kinetics Internet Fund (WWWFX ), which opened in 1996, was one of the first Web-oriented portfolios. The fund had a gripping story: Its young manager, Ryan Jacob, ran the business out of his mother’s garage. Amid the tech run up, assets swelled to as high as $1.5 billion as the portfolio gained 216% in 1999. Then the bubble burst, and the fund lost its luster.
All of the hype and subsequent bad publicity made Kinetics’ co-founder Peter Doyle press-shy. In a recent and rare telephone interview from his Sleepy Hollow (N.Y.) office, he told BusinessWeek: “We have the reputation of being technology investors, but that is not who we are. We have done so many things right.”