When fellow Fool Shannon Zimmerman launched Motley Fool Champion Funds in March 2004, he wrote that his mission would be to help subscribers "beat up on the market" with mutual fund investments. More than two years later, he's succeeding: Champion Funds selections are up an average of 18%, versus 8% for the relevant benchmarks.
Invest with the best
The secret, Shannon says, is to invest with the best managers without paying steep fees. Compare the average Champ with the average equity fund:
|
Key characteristics |
Domestic stock fund avg. |
Champion Fund avg. |
|---|---|---|
|
Manager tenure |
4.2 yrs. |
8.9 yrs. |
|
Expense ratio |
1.42% |
0.95% |
|
12b-1 fee |
0.38% |
0.01% |
|
+/- S&P (3 yrs.) |
1.89% |
5.71% |
|
+/- S&P (5 yrs.) |
1.85% |
8.75% |
|
Turnover |
93% |
58% |
How much would the extra fees cost you? Well, 47 basis points on $10,000 comes to $47. That might not seem like much. But what if your original investment grows at annualized rate of 10% before fees? Invested in a Champ, your $10,000 becomes $23,597 after 10 years. Invested in a more expensive domestic stock fund, your $10,000 becomes $22,526. That's $1,071 in your fund manager's pocket instead of yours.
The price of poor management
Poor management can cost you, too. According to the mutual fund screener at Yahoo! Finance, more than 1,000 funds lost money over the past five years. Not surprisingly, nearly half of the 49 with annualized losses of greater than 10% have switched managers since 2001.
Moreover, in a handful of cases, losing managers were running several different losing funds. The lesson, of course, is that winning funds win because of the stock pickers behind them.
What the next Peter Lynch will be like
Take Peter Lynch, for example. The legendary manager of Fidelity Magellan (FUND:FMAGX) delivered annualized returns in excess of 29% during his 13-year tenure. In many ways, Lynch is the model championship manager. Accordingly, there are several Lynchian aspects to the managers with whom Shannon invests. Here are just a few.
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They won't trade frantically: While there are important exceptions to the rule, low turnover is generally the mark of a superior stock-picker. In Lynch's case, buying to hold led to huge gains from Ford (NYSE:F), Chrysler, and Volvo from 1982 to 1988. By the end of those six years, Magellan had recorded nearly $200 million in profits.
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They'll be unafraid to concentrate: Superior managers often load up when their best investment ideas get cheap. For Lynch, that was mortgage securities pioneer Fannie Mae (NYSE:FNM). In Beating the Street, he wrote that Fannie's Mae's 1985 P/E had sunk to just 2 on deep concerns over the savings and loan meltdown taking place at the time. So of course, he upped Magellan's stake to 2.1% of the fund. Years later, he'd be sitting on multibagger returns.
- They'll invest alongside you: I can't speak to this from Lynch's point of view, but championship managers such as Bill Nygren of Oakmark I (FUND:OAKMX) tend to have substantial investments in the funds they run. That's exactly as it should be.
As you screen for funds, seek tenured managers who stick to their strategic guns, are willing to make big bets that are consistent with a winning approach, and eat their own cooking by investing right alongside you. You may find the next Peter Lynch.
We've already found him
Shannon, however, believes he's already found him. This manager's unique computer models have pounded the S&P 500 consistently for years. Accordingly, Shannon has added two of his funds to the Champion Funds portfolio, one of which is beating the index by more than 30 percentage points on the back of small caps such as Amkor Technology (NASDAQ:AMKR), Celadon Group (NASDAQ:CLDN), and OmniVisionTechnologies (NASDAQ:OVTI). If you'd like to meet the man behind the returns, we've a special report available to subscribers now. Click here to get a copy and access to the entire lineup of champs.
Or, if you'd like, go it alone. Just remember: Good managers deliver great returns, and bad managers deliver awful results. Before investing, ask yourself whether your fund's manager sports Lynchian qualities. If so, is the price cheap enough to make you seriously rich over time? The answers to those two questions can help you find the path toward creating a championship portfolio of your own.
Fool contributor Tim Beyers didn't own shares in any of the companies or funds mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile . Fannie Mae is an Inside Value recommendation. The Motley Fool has an ironcladdisclosure policy.
