Go-Anywhere Funds Let Managers Set the Menu: IA Mutual Fund Focus, May 2010

To uncover attractive go-anywhere funds we screened funds that invest in domestic equities of varying market capitalizations. We looked for funds with four or five star rankings from Standard & Poor’s, at least $20 million in assets, no upfront sales load, and that are open to new investors with initial minimums of $10,000 or less. We found well over 100 distinct funds meeting those criteria, but many of them confine themselves almost exclusively to equities, and often to either growth or value styles. Others have thematic restrictions like investing only in socially responsible companies. Only a very small group of funds will allow themselves to invest in any proportion of fixed income, equity or cash, or engage in short sales and arbitrage.

Of the dozen or so funds that do give managers such freedom, three stand out as worthy of consideration as a core holding for having substantially outperformed the S&P 500 over their lifetimes. The Fairholme Fund (FAIRX *****) has seen its assets swell to $12.7 billion at the end of February, 2010 from $1.6 billion in 2005 thanks to its consistently strong returns. As of that date, the latest available, the fund had half of its assets in domestic equities, holding a portfolio of just 17 different stocks. Within that group, its largest holding was Sears [SHLD $105 ***], representing about 10% of the entire fund. The other half of its holdings is spread across various types of fixed income instruments including commercial paper, corporate and convertible bonds, Treasury bills, and money market funds as well as a small holding in foreign stocks.

The fund’s prospectus specifically states it can invest in “special situations.” One of those the fund is currently involved with is its $860 million loan to shopping center REIT General Growth Properties (GGP NR), which is the subject of a bidding war as it emerges from bankruptcy.

The $110 million Auxier Focus Fund (AUXFX *****) is run in accord with its manager’s belief in “the power of compounding” and a “strong aversion to capital loss.” Like the others, it holds a concentrated portfolio of 15 to 35 value stocks, with a maximum weighting of 10% for any single issue. As of April 30, its top holding was Philip Morris International (PM ****). It had about 24% of its assets in fixed income at the end of 2009. The fund says it engages in short sales and “workout” situations that have a specific timetable for completion such as reorganizations and mergers. It is somewhat more accessible than other funds, with a minimum investment of just $5,000 compared with $10,000 for the other two funds.

Like the other funds, the $1 billion Wintergreen Fund (WGRNX $12 ****) owns value stocks, though it takes a slightly more explicitly global approach. As of the end of 2009, it had over 60% of its assets in foreign stocks, with 11% in fixed income and the remainder in domestic equities. Its top holding was UK-based diversified holding company Jardin Matheson (JMHLY NR). While the fund says it sticks to equities “under normal market conditions” it does not hesitate to own the debt of companies going through bankruptcies and restructurings, and it is not shy about being an activist investor if it feels the fund would benefit.

S&P Senior Financial Writer Vaughan Scully can be reached at [email protected]. Send him your ideas for mutual fund story topics.