S&P Picks Best-Managed Mutual Funds

The first is performance. Kinetics Paradigm (KNPCX ) earned a 20.3% average annual return for the 2002-2006 period. That’s nearly 15 percentage points better than the Standard&Poor’s 500-stock index. (The Internet Fund, which has a new manager, gained an average 6.2% during the same period, while the firm’s other three funds are outpacing their peers.)

Right now, Paradigm’s $2.8 billion portfolio, which has a wide berth to invest in large-, mid-, or small-cap stocks, is loaded with securities exchanges and other investment-related financial plays. “If you believe stocks, bonds, and real estate are good investments…why not own the gateways and the gatekeepers?” says Doyle. The largest current holding is the NYSE Group, which owns the New York Stock Exchange (NYX ) and is unloved by Wall Street.

Kinetics’ contrarian ways caught the eye of fund analysts at s&p. Doyle’s anti-herd mentality helped him establish credibility with Dino Macaluso, a financial consultant in Albany, N.Y. During a sales pitch in late 2001, Doyle told Macaluso and his colleagues that Cisco Systems would soon trade in the single digits and other tech companies would experience a serious correction. “Most people in this business paint a happy scenario,” Macaluso says. “The fact that Kinetics marches to a different beat is refreshing.”

THORNBURG CORE GROWTH FUND

It’s called the Thornburg Core Growth Fund, all right, but manager Alexander Motola has his own ideas about what constitutes a growth company. It’s not just about buying companies with rocketing revenues and earnings. Indeed, some of the fund’s top stocks, like DirecTV (DTV ) and Hertz Global Holdings (HTZ ), are just as likely to show up in the portfolios of value funds. “We have a pretty flexible approach to growth,” says Motola. “To us, a growth stock is one that’s promising but where there may be some material misperception about the company’s earnings potential.”

Actually, it’s not that different from the approach of Legg Mason Value Trust manager Bill Miller (a five-time winner of the fund manager award) to value investing, which includes stocks like Amazon.com (AMZN ) and eBay (EBAY ). Motola was attracted to Hertz, for example, when criticism about the company’s quick return to being a public company after a 2005 leveraged buyout distracted investors from the car rental giant’s strong growth prospects. “This ownership is extremely motivated now to move the stock price up,” he says, noting that the LBO firms that took it private–Clayton, Dubilier&Rice, The Carlyle Group, and Merrill Lynch Global Private Equity–still own a significant chunk of the company’s shares.

He’s also willing to venture beyond U.S. borders. Shares of Copa Holdings (CPA ), which owns a Panamanian carrier called Copa Airlines, were languishing in the mid-20s last year on concerns about high fuel costs and a tricky takeover of a Colombian competitor. But Motola saw the company was able to maintain operating margins amidst all of the pressure. The stock has more than doubled since.

Motola’s wide-ranging philosophy has rewarded shareholders with an average gain of 14% annually over the past five years, nearly double the average gain in the S&P 500. Thornburg is based in Santa Fe, N.M., far from the daily grind of major financial centers. If the markets get too chaotic, Motola calms down by slipping out of his office. “When you can look up at an 8,000-foot peak, it’s more conducive to keeping your sanity,” he says.

Thornburg’s assets under management just about doubled last year, to $35 billion, but it’s still a small company for the $10 trillion fund industry. One advantage of their size is that there’s no pressure to develop lots of new funds covering hot investment areas. “Every fund here is started by the investment department, not marketing,” says Motola. That’s why after 25 years, Thornburg runs only six stock funds.

STRATTON SMALL-CAP VALUE FUND

Stratton Management, which runs the award-winning Stratton Small-Cap Value fund (STSCX ), is the smallest fund company on our list. Perhaps that’s because marketing isn’t a priority: The company’s bare-bones Web site looks as if it were designed in 1996, a millennium ago in Internet time. “We are not proactive,” concedes Gerald Van Horn, co-manager of the Stratton Small-Cap Value fund. “We have no marketing budget.”

Indeed, when Robert Nelson, vice-president at 1st Source in South Bend, Ind., was researching small-company funds for his clients a year ago, he called Stratton for information. Nelson expected to be zapped fund reports electronically, but some printouts arrived later via U.S. mail. “That really caught my eye–no one mails anything anymore,” Nelson says.

Stratton’s outreach methods are fusty, but the Plymouth Meeting (Pa.) fund’s returns are anything but. The total return for the five years ended Dec. 31, 2006, is 16.7%. Stratton earns a place on the list, too, because it is still open to new investors. Many top small-cap value funds are closed.

With a relatively modest $750 million in the small-cap portfolio, Van Horn says he has no trouble putting new money to work. With the help of computer screens–his investment methods are 21st century–Van Horn tries to identify unloved, undervalued stocks. Stratton’s small size means more personal service, too. Have a question about a stock or strategy? Van Horn and the company’s other investment professionals actually take shareholder calls.