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Screening managed mutual funds for value added

Richard Loth

A month ago, Scott Burns, the Dallas Morning News’ outstanding business writer, provided his readers with the results of an extensive exercise in screening thousands of managed stock funds in search of a “tiny list of funds where history indicates the manager earns extra return without extra risk.”Burns and I are strong proponents of index mutual funds. Consequently, funds that employ active management are put through the wringer in order to be considered worthy of investor consideration. A reasonable risk-return profile, above average performance over an extended period of time, low costs, no sales-charges and low portfolio turnover rates are the principal investment qualities to look for.Without going into a lot of detail, suffice to say that Burns’ objective was to come up with the best selection of actively-managed funds for each of the nine squares in a Morningstar style box, which covers large, medium and small-cap company sizes and the three basic investing objectives – value, blend and growth.The survivorsThe strict screening criteria produced only seven funds and left the mid-cap value, small-cap value and small-cap blend squares of the style box blank – no fund passed the test for these three categories. In all, only seven funds made the cut. I looked carefully at these survivors and picked just two that stood out from this very select group: Thompson Plumb Growth, a large-cap stock blend fund, and Value Line Emerging Opportunities, a small-cap stock growth fund. Thompson Plumb Growth Fund (THPGX)Despite the inclusion of the word “growth” in this fund’s name, this large-cap fund falls squarely in the blend category. THPGX has an average annual 10-year total return of 16.88 percent as of July 30, compared to 9.56 percent and 11.09 percent for its peer group and the S&P 500 Index, respectively. At $1.4 billion in total assets, size is not an issue for this large-cap fund – it has ample room for growth. THPGX’s annual portfolio turnover rate of 41 percent is not unreasonable and compares favorably to its peer group rate of 64 percent.The fund’s initial investment minimum is a low $1,000, there is no sales-charge and the expense ratio is 1.07 percent, which is slightly below the peer group average of 1.15 percent.Current management, the father and son team of John W. Thompson and John C. Thompson, has generated the fund’s enviable 10-year performance record. Here’s the clincher for THPGX – the Thompsons, collectively, have $4 million of their own money invested.Value Line Emerging Opportunity Fund (VLEOX)This small-cap growth stock fund has registered an average annual 10-year total return of 13.67 percent as of July 30, which is considerably above the comparable performance of its peer group (8.48 percent) and the Russell 2000 Growth Index (6.00 percent). The fund is a part of the Value Line family of funds. Since 1998, it has been managed by Steve Grant, who is supported by 70 Value Line analysts and guided by its well-known and respected quantitative ranking systems.VLEOX’s relatively small size — $283 million in total net assets – is appropriate for this type of fund. It has a low initial minimum investment of $1,000, no sales-charge and an expense ratio of 1.36 percent, which is well below the peer group average of 1.73 percent. The portfolio turnover rate is somewhat on the high side, 79 percent, which is not unusual for this type of fund and still considerably below the peer group average of 140 percent. Funds with solid fundamentalsWhile past results are no guarantee of future performance, both the THPGX and VLEOX funds are standouts. Their equalized risk-return performance, below average costs, relatively low portfolio turnover and quality, long-term management reflect solid fundamentals. If you’re going to consider actively-managed mutual funds for your portfolio, funds like these set the standard.The Investing Wisely column is written by Richard Loth, managing principal of Mentor Investing, an independent registered investment adviser. Loth can be reached at 827-5591 or mentorinvesting@comcast.net.


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