If you invest only in well-known mutual funds from investment giants such as Fidelity and Vanguard, you’re missing out on some of the best-performing funds helmed by some of the most talented managers. It’s easy to miss these little gems. They tend to operate far from Wall Street in places such as Austin, Texas…Cobleskill, New York…and Salt Lake City. That gives them a fresher, more independent perspective on the stock market. Many of the funds don’t advertise and aren’t available through the giant firms. That means you may have to invest directly with the small fund company.
Here is why these funds are attractive now…
Small asset bases. Many of these funds have just a few hundred million dollars (compared with well-known elephants such as Fidelity Contrafund, which has $121 billion in assets). Asset size can be a major determinant in performance. Small funds often are better able to move in and out of investments quickly without affecting the stock prices, and they can hold concentrated portfolios that reflect only their best investment ideas.
Greater dedication by managers. Many under-the-radar funds are managed by their founders, who keep a large amount of their own assets in the fund. That often makes the managers better stewards of your money because they have great incentive to avoid losses and not take excessive risks.
Unusual investment strategies that you may not get at large funds, which often tend to take a more conventional, vanilla approach that doesn’t stray far from the broad market indexes.
These five funds have excellent long-term performance and are rated four or five stars by research firm Morningstar Inc. They also have assets of less than $1 billion and are open to new investors with no loads (up-front commissions) and low initial minimum purchase requirements of $2,000 or less.
For investors who want simple exposure to blue-chip stocks…
Voya Corporate Leaders Trust (LEXCX) is the ultimate buy-it-and-forget-it investment. When the fund was launched in 1935, the creators bought an equal number of shares in 30 leading dividend-paying companies that managed to excel during the Great Depression. By charter, the fund can never add or eliminate a company, except through spin-offs, mergers and acquisitions or if a company suspends its dividend or goes bankrupt. There are 22 firms left in its portfolio, including original investments such as DuPont and Procter & Gamble, as well as Warren Buffett’s Berkshire Hathaway, which bought out Burlington Northern and Santa Fe Railway.
Why it’s attractive: The fund’s annual returns, on average, have topped the S&P 500 Index by about one-half percentage point annually over the past 15 years and by one-half percentage point annually since the inception of the S&P 500 back in 1957. It has accomplished this with no exposure to big technology and social-media companies that have led the market, such as Apple, Amazon, Facebook and Microsoft. The fund should continue to excel as the US economy grows because it remains a who’s who of dynamic American businesses. Performance: 13%.* Individuals.Voya.com
For investors who want a more aggressive fund with fast-growing companies…
YCG Enhanced (YCGEX) has a great pedigree—fund manager Brian Yacktman is the son of legendary investor Donald Yacktman. After working with his father and older brother at the AMG Yacktman funds, helping oversee $12 billion in assets, Brian struck out on his own in Austin, Texas, at the end of 2012.
Why it’s attractive: With its tiny asset base, YCG has ranked in the top 2% of its category over the past five years. Brian executes a similar approach as his father, building a portfolio of about 50 large-cap companies whose brand-name products have great long-term potential but whose stocks have been beaten down because of short-term problems. He tends to stay more fully invested than Donald Yacktman’s funds. Recently he loaded up on luxury-goods makers such as LVMH Moët Hennessy Louis Vuitton and Hermès International. Their stock prices are depressed because of concerns about a slowdown in China’s growth, but their products are must-have status symbols for new millionaires around the globe. Five-year annualized performance: 11.7%. YCGFunds.com
For more conservative investors…
Homestead Value (HOVLX). Its humble beginnings have shaped the fund’s effective but old-fashioned stock-picking strategy. It was launched nearly 30 years ago by the National Rural Electric Cooperative Association to invest on behalf of employees of locally owned electricity companies. The fund continues to look for cheap stocks with superior profitability and below-average debt. Its portfolio holds about 40 companies, mostly financials and industrials such as JPMorgan Chase and adhesive-materials manufacturer Avery Dennison.
Why it’s attractive: Great consistency makes the fund easy to own, keeping pace with the broad market in good years and beating it in bad years. Performance: 12.1%. HomesteadFunds.com
If you want exposure to US and foreign small companies…
Seven Canyons World Innovators (WAGTX) has a manager who has a stellar long-term track record. Back in the mid-1970s, manager Sam Stewart launched Wasatch funds in Salt Lake City, building that company into a global small-cap investing juggernaut with $17 billion in assets. In 2018, Stewart decided to escape the demands of running such a big company. He left and was allowed to rebrand and take with him the highly acclaimed fund that he personally managed—Wasatch World Innovators.
Why it’s attractive: You get Stewart’s expertise as he puts all his attention and energy into a $120 million fund that has performed in the top 1% of its category over the past decade. Also, many investors could benefit from the diversification that this fund provides. It has an unusual strategy of scouring the world for small-cap and microcap companies that sell innovative products, such as Avon Rubber, which makes respiratory protection equipment for law-enforcement officers and the military, and Catapult Group, which manufactures wearable sensors to monitor athletes. Performance: 12.4%. SevenCanyonsAdvisors.com
If you want a fund that holds up well in tough times…
FAM Dividend Focus (FAMEX). Manager Thomas Putnam started FAM in the 1970s as a means to manage the multimillion-dollar windfall his family received from selling its successful textile business, Fenimore Fabrics, in Cobleskill, New York. Putnam wanted to invest in the same types of companies as the family business—high-quality small and midsize firms that paid a rising dividend with little or no debt, strong cash flow and solid management. His portfolio of 33 stocks includes discount-clothing retailer Ross Stores and medical-equipment manufacturer Stryker.
Why it’s attractive: Few competitors have been able to match this fund’s ability to stave off big losses. That’s especially impressive with volatile small companies. For example, in last year’s fourth-quarter stock market pullback, the fund fell just 10% versus 20% for the Russell 2000 Index. Putnam’s defensive posture hasn’t held the fund back in up markets. It ranks in the top 9% of its category over the past decade. Performance: 13.3%. FAMFunds.com
*Performance figures are annualized returns for 10 years through August 31, 2019, unless otherwise specified, according to investment research firm Morningstar Inc.