While there is a far amount of skepticism out there surrounding actively managed mutual funds, there are a small number of managers with the skill to actually outperform the market over the long run. The trick is to identify these managers before everyone else does.
Of course, once you find such a person, you should ask yourself if you would be willing to let him or her take a very concentrated approach to investing your money. After all, wouldn't you rather have two dozen of your manager's best ideas than 100 mediocre ideas? Taking a concentrated investing approach certainly has its risks, but when carried out by talented professionals, the results can be very pleasing. Let's look at three successful actively managed mutual funds that tend to focus on just a few dozen holdings in their entire portfolio.
This socially responsible value fund has only been around since the end of 2006, but in its short life it has managed to rack up a category-topping, if very volatile, track record. According to Morningstar data, at last count the fund held just 24 securities, so you're really relying on management's stock-picking skills here. The team of five portfolio managers looks for undervalued stocks with strong fundamentals, while keeping a strong focus on potential downside risk to the portfolio. But in addition to these criteria, the team also requires a company to behave in a responsible manner with respect to their impact on the environment and on society in general. So this fund clearly won't look or act like many of its peers.
As might be expected, this high-conviction portfolio tends to cluster its bets in certain sectors. Health-care names currently make up just more than a third of the fund's equity holdings. Big plays here include Pfizer
Over the past three years, Appleseed ranks in the top 2% of all mid-cap value funds. That's impressive, but due to its defensive stance the fund has also ranked near the very bottom of that same grouping in the past year. So expect some volatility here, but if you're looking for a socially responsible fund that's willing to take a stand on the direction of the economy, Appleseed is a good choice.
FMI Large Cap (FMIHX)
The management team in charge of FMI Large Cap also employs a highly concentrated investing approach, with just 26 stocks in the portfolio at last glance. Management looks for firms with a strong franchise, high cash flows, and significant market share whose stocks are trading below estimates of fair value. The team believes many solid yet unexciting companies have lagged in the current market rally and has made a point of owning many of these firms, including UPS
FMI Large Cap is a solid, large-cap anchor fund for any portfolio. While you wouldn't want this fund to be your sole source of large-cap exposure, it could serve as a good complement to a broader, more inclusive index fund or exchange-traded fund. With such a concentrated portfolio, it's possible that management's stock picking could work against the fund at some point, but so far, their track record has been impeccable. Since its inception in January 2002, the fund has posted an annualized 7.2% gain, versus a 3.3% showing for the S&P 500 index and a 2.8% return for the average large-cap blend fund. This concentrated fund is a long-term winner.
This oldie but goodie dates back to 1970, although the current lead manager has been at the helm for just short of 13 years. Sequoia reopened to new investors in May 2008 after being closed for 25 years, so it's no surprise that many folks have been giving this fund a second look. Management here follows a Buffett-like investing approach, seeking out top-quality companies with sustainable competitive advantages and excellent management teams. Perhaps not surprisingly then, Buffett's own Berkshire Hathaway
Fortunately for investors, that high-conviction approach has translated into some pretty hefty returns for investors. Over the past decade and a half, the fund has cranked out an annualized 9.4% return, better than 96% of all large blend funds.
But don't expect the portfolio to consistent entirely of your run-of-the-mill value stocks. The team recently purchased Google
Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. At the time of publication, she did not own any of the funds or companies mentioned herein. Pfizer, Berkshire Hathaway, and Google are Motley Fool Inside Value selections. Berkshire Hathaway is a Motley Fool Stock Advisor selection. Google is a Motley Fool Rule Breakers pick. The Fool owns shares of UPS , Monsanto, Berkshire Hathaway, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days.
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