But don’t yank all your money out of your small funds just yet. While the mutual-fund industry is grappling with slower growth, many small funds are outperforming the giants. For one thing, their fund managers make decisions without meddlesome investment committees and can change a portfolio’s tilt instantly. And many small companies are more driven to producing stellar returns than many of their larger, well-known rivals. “When you’re small, you tend to be performance-oriented because it’s the only way you’ll get any attention,” explains Randy Hecht, chief operating officer of Robertson Stephens.
To be sure, the Goldman report raised some important concerns. Consumers aren’t stowing as much money as they used to in mutual funds, and money managers must spend millions on marketing to get a flicker of recognition. So, attracting new customers is getting much more expensive. Before long, Goldman reckons, companies will need to manage at least $60 billion to produce robust profits. Its advice to small firms? Grow rapidly, find a good niche or merge. Otherwise, you won’t be able to survive bear markets and other setbacks. Believe it or not, performance isn’t enough to guarantee success – brand-name recognition sells funds today.
Goldman makes an interesting case. The trouble is, there’s little evidence to support its theory right now. For example: while big firms like Dreyfus and Scudder are awash in negative returns this year, most funds in small families like Robertson Stephens, Tweedy Browne and FPA are posting solid results. What’s more, today’s up-and-comers can run a very tight ship. Instead of building an expensive operation, they can hire subcontractors to answer the phones, print customer statements and keep the books. So much for the expense argument. The latest cost-saving service: selling funds through networks offered by discount brokers like Charles Schwab (page 57), Fidelity and Jack White. It’s so cheap to peddle funds on those networks, says Gordon Snyder at Twentieth Century, that “by default you’re going to make a lot of money.”
There are a slew of small fund families that experts say could become the next Twentieth Century, which manages about $24.8 billion out of Kansas City, Mo. The following are four highly regarded small fund families that don’t charge sales fees. What they have in common: the ability to run circles around the giants.
This ambitious four-fund family is the industry’s feistiest challenger to the status quo. Three of its funds can short stocks – a bet that a company’s price will fall. Most mutual-fund companies forbid it. The company’s goal for its investors: a 10 percent return – after subtracting the effect of inflation and taxes. Most fund companies are forecasting 5 to 8 percent returns, before those bites.
Over the past four years, cofounder Paul Stephens has produced an average annual return of 31 percent running a small portfolio for wealthy investors. His Contrarian Fund, which takes many of the same positions, could meet the corporate goal this year. It has returned 6 percent through June 23 – 9.6 percentage points better than the S & P 500. Stephens believes that hard assets, such as gold and oil, and stocks in tiny new foreign markets will appreciate. He’s so down on the market, though, that he’s betting against his own industry by shorting the stocks of mutual-fund companies. If he’s wrong, he’ll suffer along with his shareholders – “At Robertson everybody has all their investable money in their fund,” says Hecht, the chief operating officer. How big are the company’s plans? By the late 1990s Hecht expects to manage about $10 billion, up from $1.5 billion.
This old-line, New York City money-management firm has only two funds. But partner John Spears and his three comanagers are considered one of the shrewdest investment teams in the industry, typically paying between 50 and 60 percent of a stock’s true value. Example: Calcasieu Marine National Bank in Louisiana. At $50, it cost Tweedy just 54 percent of the value of the assets listed on the bank’s balance sheet. That’s a bargain. On average, stocks in the S & P 500 index sell for nearly 300 percent of their so-called book value. Tweedy paid about $31 for another holding, Chase Manhattan, which is 110 percent of book value.
Such picks have led to a 17.4 percent average annual return since 1976, compared with the S & P 500’s 14.3 percent. Only six months old, Value fund hasn’t matched that record yet. It’s down 1.3 percent this year, still better than the average mutual fund, which slid 5.1 percent. The firm’s other fund – Tweedy Browne Global Value – produced a much stronger 15.4 percent return during its first six months of operation last year and has chalked up 6.5 percent this year – 7.4 percentage points better than the average foreign fund.
Here’s a classic example of a new-style fund family. It’s tiny, with only one $2 million fund; it hires outsiders to handle the phones and all other noninvestment chores, and it’s perfectly happy staying small. “I’m not going to run ads,” says David Klaskin, chief investment officer. “You can be very profitable if you don’t go crazy on promotion.”
It also helps to have a profitable backer. Klaskin launched ORI on the strength of his extraordinary success with Oak Ridge Investments, a Chicago money-management firm he founded in 1989. One of Oak Ridge’s portfolios averaged a 51 percent annual return between 1991 and 1993, according to Price Waterhouse. But that record will be tough for ORI to match, especially this year. Not only is the market drifting down, it is punishing investors such as Klaskin, who buys the stocks of companies with earnings that are growing quarter by quarter. ORI’s portfolio of midsize companies, such as Columbia Healthcare and Midlantic Corp., is feeling the onslaught – it’s fallen 2.8 percent. But Berger 100, a fund with a similar investing style, has plummeted 14.5 percent.
This 10-fund clan wins the most-likely-to-become-Fidelity award among the pipsqueaks because of its star system. Fund managers are treated as owners of their businesses and prominently touted in Warburg advertisements. “Their performance is the most important thing here,” says Eugene Podsiadlo, a senior vice president.
Lately the spotlight has been on Anthony Orphanos, manager of Growth and Income, and Richard King, who runs International Equity. In 1993, Orphanos earned a 37.1 percent return, thanks to some timely forays in and out of gold and financial stocks. King topped him with a 51.3 percent return last year – dramatic even among 1993’s eye-popping international gains. This year Orphanos is up 5.1 percent and King up by just 1.8 percent. Not last year’s figures, but far ahead of the competition – and, Goldman Sachs take note – well above many funds run by the larger firms.
