When talking about famous mutual funds, it's easy to see the connection between great performance and great managers. Peter Lynch, for instance, generated an astounding 29% average annual return at the helm of Fidelity Magellan from 1977 to 1990. Over his 13 years, $10,000 invested would have grown into $300,000.
Yet it's also easy to fall into a general mutual fund malaise, picking a few for your 401(k) and then forgetting them -- without really knowing anything about your managers. But as Lynch showed us, managers are stock pickers, and it pays to find out just how they go about it.
Two good ones
Let me give you a couple of examples, starting with the Royce Special Equity (RYSEX) fund (now closed to new investors). This one has many qualities that Fool fund guru and Motley Fool Champion Funds analyst Shannon Zimmerman loves, including a reasonable expense ratio, solid stewardship, and a manager with a good track record. Manager Charlie Dreifus looks for small-cap value plays and bases his stock-picking methodology on the teachings of Ben Graham and Warren Buffett. "What I adopted from Buffett," he told Shannon in an interview, "was a metric I use as a proxy for franchises: return on invested capital." Dreifus is also well-known for his patience. He buys good companies and then gives them time to show their stuff. Once told that investing with him was like watching grass grow, he viewed that as a compliment. "To me, grass grows in only one direction: up."
Another great example comes from Arthur Moretti, senior manager of the Neuberger Berman Socially Responsive (NBSRX) fund, Shannon's February 2004 Fund of the Month. Moretti has a bit more latitude than most socially responsible investing (SRI) managers and, like Dreifus, has an eye on value. "We are very valuation-sensitive and research-driven," he says. "What we try to do is buy very high-quality companies but buy them both when they are statistically inexpensive [and] when, from a research point of view, we think we can add a lot of value as analysts and where we may be seeing things that Wall Street either doesn't see or isn't willing to pay for today."
You can get an idea for the types of stocks Moretti is looking for by looking at his fund's list of top holdings:
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NB Socially Responsive Major Holdings |
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Texas Instruments (NYSE:TXN) |
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Citigroup (NYSE:C) |
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Teradyne (NYSE:TER) |
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Dell (NASDAQ:DELL) |
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Toyota (NYSE:TM) |
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Liberty Media (NYSE:L) |
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UnitedHealth (NYSE:UNH) |
Play detective
It's important that you align yourself with managers who think like you do. If value investing isn't your thing, and you long for the next great growth stock, you should probably steer clear of the two funds above. And it's really not that difficult to do a little sleuthing to dig up info on your managers. At the very least you can visit the fund's website and read the manager's bio, but a good step beyond that is to enter the name into a search engine and read all you can.
Shannon has shown a great knack for identifying outstanding stock pickers in Champion Funds. His official fund recommendations are beating the market and relevant benchmarks, 24% to 11%, since the service began two years ago. You can see all of his recommendations, right now, by signing up for a 30-day free trial. There is no obligation to subscribe.
Rex Moore just finished all the Wheaties. He owns no stocks mentioned in this article. Dell and UnitedHealth are Motley Fool Stock Advisor recommendations. Dell is also a Motley Fool Inside Value recommendation. Here's the Fool'sdisclosure policy.
