These Funds Are Cooler Than You

Here's what I think. I'm guessing that you prefer stocks to mutual funds. You're too hip to pool your money with complete strangers and let someone else call the shots. You're in this market because you love stocks, and buying a fund is like bringing in a middleman to do a job that you relish.

Is that you? A fair composite, at least? I thought so. You probably know every single publicly traded semiconductor or oil-exploration company, but you couldn't rattle off the ticker symbols for Fidelity Magellan or the Vanguard S&P 500 fund.

That's cool. The tickers are FMAGX and VFINX, respectively, if that ever comes in handy during Final Jeopardy.

I'm going to take you in a different direction. I'm going to introduce you to some mutual funds that may feel just right in your portfolio, even if you're the type to roll your own in the stock market.

The arbs have it
Mergers and acquisitions can pay off for individual investors -- if they happen to own the stock that is being snapped up at a premium. Once the deal is announced, the game moves on to more financially potent arbitrageurs.

In these deals, the company being acquired often settles just shy of the ultimate buyout price. Bidding-war speculation may break out, boosting the stock of the company to be acquired, but that's not the usual scenario. Arbs move in for the spread in the more boring deals. They can buy shares in the acquired company and short the equivalent amount in the acquirer if it's an all-stock deal, or just take a position in an all-cash purchase.

The arbs aren't looking for a homer. They'll settle for the bunt single. If a stock is trading at $20, and it's set to be acquired at $21 in a deal that will close in six months, that's a 5% return in half a year with minimal risk. Yes, it's not completely risk-free. Deals fall apart. That only makes it harder for the individual investor to play this game.

Thankfully, there are a handful of no-load mutual funds doing this in volume to help offset the blowouts. The returns will never be spectacular, but the allure here is an investment that should trounce short-term fixed-income investments with limited stock market exposure. Merger Fund has been at it since the 1980s. Rival Arbitrage Fund has produced slightly better returns over the past five years, but Merger offers the longer track record and the lower expense ratio, which is critical in this game of inches.

Exotic pools for your diving pleasure
If you're up for a little risk -- as I'm sure you are, if you're a stock jockey -- the mutual fund universe offers thousands of tantalizing possibilities.

I have always owned a mutual fund or two with an international bent. Since most of us don't have the time to dig for diamonds in the rough on overseas exchanges, having pro money managers do that for you is a blessing.

Shannon Zimmerman has singled out five different international funds for readers of his Motley Fool Champion Funds newsletter service. Sure, you can buy shares of companies like Vodafone (NYSE: VOD  ) , Diageo (NYSE: DEO  ) , and Tyco (NYSE: TYC  ) -- three of the largest holdings in Shannon's latest global fund pick -- directly, but isn't a seasoned value manager with a passport-proven Rolodex worth a modest 1.31% expense ratio?

Bringing it all home
Even if you want to stay closer to home, you have plenty of funds that are cooler than Arthur Fonzarelli. Excelsior Value & Restructuring is busy buying turnaround plays that offer a shot at surprising the market, such as Black & Decker (NYSE: BDK  ) and homebuilder Centex (NYSE: CTX  ) .

The strategy has worked well for Excelsior: The fund has beaten the market in the past three-, five-, and 10-year periods.

Feeling a bit more daring? The Firsthand family of funds might have something up your alley. The company was founded by technology-industry veterans who felt that the best investors were those who knew the tech world from the inside.

Firsthand Technology Value remains the company's flagship fund, even though the firm has added funds specializing in everything from biotechnology to e-commerce. Top holdings at the main fund include names you may recognize, such as Motley Fool Stock Adivsor recommendation Netflix (Nasdaq: NFLX  ) and Motley Fool Rule Breakers pick Akamai Technologies (Nasdaq: AKAM  ) .

I'm not keen on Firsthand's unusually high expense ratios. The funds also got trounced when the tech bubble burst five years ago. However, it is a pretty good place to be when the technology bulls are running.

Put it all together, and it makes for one heckuva yearbook. You have arbitrage funds to spice up low-risk investing, deep value alternatives, and bottle rockets. They're all cool. And they're definitely cooler than me, even if they aren't cooler than you.

If you're nodding your head and looking for some additional cool funds to perfect your portfolio, the Champion Funds premium research service may be just the ticket to get you swinging with the fund-world hipsters. If you're not sure, a 30-day guest pass will grant you access to all of Shannon's picks and model portfolios.

Think it over, if only for the sake of cool.

Longtime Fool contributor Rick Munarriz thinks that funds are part of a balanced portfolio breakfast. He owns shares in Netflix, which is a Stock Advisor pick. Vodafone and Tyco are Inside Value recommendations. Diageo is an Income Investor pick. Akamai Technologies is a Rule Breakers pick. The Fool has adisclosure policy.


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