Some fund managers are the financial equivalent of rock stars - investing idols that pack their famous funds like Springsteen fills Giant Stadium. But as anyone who's ever been stuck in the nosebleeds when attending a concert at a mega-arena can tell you, sometimes smaller is better. Same goes with mutual funds. Rob Wherry at Smartmoney
points out that investors can get more intimate access to some of the biggest names in fund management by investing in their lesser-known offerings:
Popular funds can swell in size so much that it impacts their performance or they can close their doors to new money, leaving eager investors out in the cold. In those cases, it pays to look at what we call a "backdoor" investment. Run by the same manager, these under-the-radar funds have the potential to be just as lucrative as their better-known brethren — maybe even more so.
The thesis behind investing in backdoor funds boils down to this: Bigger isn't always better. Funds that experience big inflows of cash may find it difficult to buy and sell stocks without artificially driving the share price higher or lower. And managers who suddenly have some cash to spend might be tempted to invest in stocks that they lack conviction about. Smaller, more nimble funds, however, can leave a manager unfettered to invest in only his best ideas."
Some fund managers are the financial equivalent of rock stars - investing idols that pack their famous funds like Springsteen fills Giant Stadium. But as anyone who's ever been stuck in the nosebleeds when attending a concert at a mega-arena can tell you, sometimes smaller is better. Same goes with mutual funds. Rob Wherry at Smartmoney
points out that investors can get more intimate access to some of the biggest names in fund management by investing in their lesser-known offerings:
Popular funds can swell in size so much that it impacts their performance or they can close their doors to new money, leaving eager investors out in the cold. In those cases, it pays to look at what we call a "backdoor" investment. Run by the same manager, these under-the-radar funds have the potential to be just as lucrative as their better-known brethren — maybe even more so.
The thesis behind investing in backdoor funds boils down to this: Bigger isn't always better. Funds that experience big inflows of cash may find it difficult to buy and sell stocks without artificially driving the share price higher or lower. And managers who suddenly have some cash to spend might be tempted to invest in stocks that they lack conviction about. Smaller, more nimble funds, however, can leave a manager unfettered to invest in only his best ideas."
'Backdoor' funds mentioned in the article:
Bill Miller
Famous For: Legg Mason Value Trust (LMVTX)
Not So Famous For: Legg Mason Opportunity (LMOPX)
Chris Davis and Ken Feinberg
Famous For: Davis NY Venture (NYVTX)
Not So Famous For: Clipper (CFIMX)
Primecap Team
Famous For: Vanguard Primecap (VPMCX)
Not So Famous For: Primecap Odyssey Growth (POGRX)
There are some other examples of smaller funds run by the same manager as a more famous big fund. Bond kingpin Bill Gross of PIMCO Total Return (PTTAX) fame manages Harbor Bond (HABDX), a cheap no-load fund. The closed John Hancock Classic Value (PZFVX) can essentially be had in a slightly different and cheaper versions called Harbor Global Value (HAGVX) - though watch out for the big financial stocks allocations in these and many value funds. Neuberger Berman International Large Cap (NILTX) is similar to International (NBISX). There are some examples of funds with loads or funds for advisors that are run by famous big fund managers, like Fidelity Advisor New Insights (FNIAX) a retool of Fidelity Contrafund (FCNTX).
We own Harbor Bond and Primecap Odyssey Growth in some of our Powerfund Portfolios.
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