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In search of tiny, perfect funds

Experts pick their offbeat favourites

INVESTMENT REPORTER

Have you ever thought how great it would be to have access to the kind of stock-picking acumen the really wealthy can afford?

It's sometimes available in some of the tiny, more obscure mutual funds that many investors rarely hear about.

These companies don't have 30-second spots running across your TV screen every hour. Nor do they attract much media attention, because their assets are so small.

Dan Hallett, analyst for Sterling Mutuals Inc., points as an example to Calgary-based Mawer Mutual Fund, which flies under the radar without a marketing team or a big advertising budget.

But while its analysts are conducting research for wealthy clients and institutional investors, their expertise is available in the company's mutual funds. "The marginal costs for them to run a mutual fund are small," he says.

In other cases, marquee companies have some less visible funds, or funds that focus on a tiny investing segment.

One of the dilemmas of the household-name funds is that the more assets they attract, the harder it is for them to jump nimbly in and out of investments.

Of course, big funds grow bigger by being successful, and that's the first caveat: Finding hidden gems among small funds takes careful research and evaluation.

Analyst James Gauthier of FundMonitor.com says many small funds invest in a niche area such as real estate or technology, which can be risky -- so investors need to assess their own risk tolerance.

Still, Mr. Gauthier believes investors who do the research can uncover some very good small funds.

National Bank Financial analyst Raynor Burke says it's also important to be able to get information on your funds. While big firms are good at sending detailed updates, small firms don't have large marketing departments and sometimes their focus is strictly on managing the money.

But that's where careful selection is important because some small firms can be very responsive, Mr. Burke says.

So what are some of the analysts' offbeat favourites among funds with assets of about $50-million or less?

Mr. Hallett, sifting among funds with a record of at least three years, points to the $34.9-million Mawer Canadian Equity Fund and its "excellent management team."

"They are a nice blend of value and growth," he says, adding the management-expense ratio of 1.55 per cent is quite low. And because Mawer also invests money for wealthy individuals, the managers are sensitive to tax implications.

The $22.7-million Standard Life Growth Equity, he says, is a small-cap fund that hasn't gained much of a following compared with some of Standard Life's bigger offerings, but has many attractive qualities.

With a three-year average annual compound return of 19.9 per cent to Feb. 28, it benefits from a large team of analysts and firm-wide discipline, he says.

For investors looking to add some bonds to their asset mix, Mr. Hallett likes the $52.6-million McLean Budden Fixed Income Fund. It has a higher minimum entry of $10,000, but Mr. Hallett says investors who have that to invest will benefit from the firm's deep management team.

The fund buys government and corporate bonds of varying maturities. "It's a good fund for really broad-based, fixed-income exposure."

Investors who need to broaden their horizons with more foreign content could try the $32.3-million Dynamic Far East Value Fund, he suggests. The fund has a relatively high MER of 3 per cent but the managers have been successful in adding value, Mr. Hallett says.

Among Canadian equity funds, Mr. Gauthier likes the $46.9-million Saxon Stock Fund managed by Richard Howson.

"Its performance has been very strong," Mr. Gauthier says, noting the fund posted a one-year return of 26 per cent to Feb. 28.

Mr. Gauthier says much of the recent gain has come from the small-cap portion of the portfolio. But that good performance does not come with added risk, he says.

Mr. Gauthier also recommends the $54.2-million O'Shaughnessy U.S. Value Fund. The stock picker is James O'Shaughnessy, who uses quantitative analysis to find investment-worthy companies.

The fund has benefited from value investing's return to favour, with a three-year average annual return of 9.3 per cent. Mr. Gauthier says he expects it to continue to post good numbers.

Mr. Gauthier also likes the Standard Life Equity Fund. The $37.4-million Canadian equity fund has an excellent risk/return profile, in his opinion, and its mainly large-cap names make up a good overall fund for conservative investors.

For something a little less mainstream, Mr. Gauthier points to the $12.4-million Mackenzie Cundill Recovery C Fund. The fund bears the name of lead manager Peter Cundill, who is renowned for his knack of picking up distressed companies on the cheap.

"What they're really doing here is looking at the bottom of the barrel and seeing if there's anything worth buying," Mr. Gauthier says. The intensity of that research leads them to companies that -- sure they're distressed -- but they're going to make it through."

The fund's mix of large and small caps from all over the world has provided what the analyst considers an excellent average annual compound return of 16 per cent for the three years to Feb. 28.

For investors interested in U.S. stocks, another fund on Mr. Gauthier's list is Mawer U.S. Equity. The $44.1-million fund has a 1.4-per-cent MER and a solid mix of financial services, health care and some technology, he says.

Mr. Burke likes two relatively new funds from the little-known firm of Meritas Mutual Funds in Cambridge, Ont.

The $2.3-million Meritas International Equity Fund and the $6.5-million Meritas Jantzi Social Index Fund have only been around for about a year and Mr. Burke notes that they launched in a "very tough market."

But the analyst likes the funds for their clear strategy of socially aware investing. Because the funds are so small, the managers have an easier time manoeuvring around the stock market, he believes.

"It can be very tough to buy into smaller names if you're a large fund," Mr. Burke says.

Mr. Burke also likes Toronto-based Ascendant Capital Management, which has $23-million in assets, including the tiny Market Neutral Arbitrage Fund.

The analyst notes that the firm has several key money managers who left more established firms.

"They're a nice little boutique."

© 2007 The Globe and Mail. All rights reserved.

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