The recent bear market hasn't exactly been kind to a lot of money managers. Despite the promises of active management, most actively managed funds were hit hard in the downturn, losing assets along with disillusioned investors. However, some fund shops have managed to buck the trend and actually grow in recent years, garnering inflows from fund-shy investors.
Mutual fund consulting firm Strategic Insight recently identified the top 10 fund companies with asset loads between $5 billion and $25 billion that had the largest new investor inflows over the previous five-year period, in percentage terms. You may not recognize all of these names, but these small and midsized shops are clearly doing something right, capturing inflows and growing assets in a notoriously difficult market. But just because other investors are running into these funds, does that mean you should, too? In this three-part series, I'll look at whether you should consider making some of these fast growers a part of your portfolio.
Pacific Heights Asset Management LLC
Taking the No. 1 spot in asset growth is Pacific Heights Asset Management, which saw net new cash inflows of 17 times its 2005 year-end assets. The biggest recipient of these new inflows has been the shop's flagship Permanent Portfolio (PRPFX), which invests in a fixed allocation of 35% in Treasuries, 20% in gold bullion, 15% in real estate and natural resources stocks, 15% in aggressive growth stocks, 10% cash, and 5% silver. Given how well precious metals such as gold and silver have done in recent years, it's no surprise the fund currently ranks at the top of Morningstar's conservative allocation category with a 10-year annualized return of 11.9%.
All in all, the Permanent Portfolio's approach is a solid one. Clearly, the fund doesn't look like most traditional stock-and-bond allocation funds, but that has worked to its advantage in the current environment. The focus here is on beating inflation over the long run, which will likely continue to appeal to investors worried about where prices are headed. Expenses are reasonable here, but since management isn't actively adjusting the asset allocation, investors could probably achieve much of the same effect by purchasing a few low-cost exchange-traded funds such as SPDR Gold Trust
Van Eck Global
Another fund company benefitting from the incredible run-up and resulting investor fixation on precious metals is Van Eck Global. The shop's largest fund is Van Eck Global Hard Assets (GHAAX), with roughly $5.4 billion in net assets, up from a mere $39 million at the end of 2002. Van Eck International Investors Gold (INIVX) has also been undergoing a growth spurt lately, thanks in part to the fund's whopping 10-year annualized return of 30.3%. Fund performance here has been driven by names such as Goldcorp
In addition, investors should be careful when considering these two Van Eck funds. Both funds charge front-end loads, so I'd only recommend buying them if you can avoid these charges. In my opinion, investors should never buy a load-bearing fund, because there are always other options out there that can get the job done without charging a load. In addition, neither of the funds are cheap. According to Van Eck, the A shares of the Hard Assets fund come with a 1.39% price tag while the Gold fund charges 1.43%. However, the shop's Y shares are much cheaper and carry no loads or 12b-1 fees, so if you can get access to this share class through a financial intermediary, owning one of these funds might make sense. If not, there are probably better fund options out there.
Fairholme Capital Management
Manager Bruce Berkowitz has gotten plenty of media attention for the stellar performance of his Fairholme Fund (FAIRX). Right now, the fund ranks in the top 1% of all large value funds over the most recent five- and 10-year trailing time periods. No doubt this hot performance has a lot to do with why the fund has grown to its current size of over $19 billion in assets. In fact, Fairholme Capital has seen inflows of 838% of the shop's 2005 year-end asset base in the past five years. Berkowitz is without a doubt a skilled stock picker, but sooner or later he will stumble. Returns won't always look this good, but knowledgeable investors will stick with the fund over the long run rather than cutting and running at the first sign of short-term trouble.
Berkowitz isn't afraid to take on risk, and the current Fairholme portfolio is reflective of that. At last glance, roughly 86% of fund assets were concentrated in the financial and real estate sectors. Berkowitz is betting big on the rebound of the financial and real estate sector, having loaded up on beaten-down, big-name banks and financials such as AIG
Check back tomorrow and Wednesday, when I'll look at the remaining seven fastest-growing fund shops and whether you should buy some of their fund offerings.
Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. Amanda owns shares of Fairholme. The Fool owns shares of Bank of America and through a separate account in its Rising Star Portfolios also has a short position on Bank of America . Try any of our Foolish newsletter services free for 30 days.
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