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Every year Morningstar picks a few "great" funds that have been overlooked by investors. As Morningstar puts it, "The more successful little funds usually offer greater consistency than popular funds because they haven't had the sort of big inflows that force them to change their strategies."
Morningstar has been compiling these lists of "forgotten" funds since 1990. Some funds named in previous years have remained relatively unknown. The popularity of most, however, has increased.
For the second time in five years, a largely overlooked fund named Greenspring made the list. Fund manager Chip Carlson "turns discarded little stocks, REITS (real estate investment trusts) and bonds into something beautiful: a remarkably stable, domestic-hybrid fund with consistently strong returns," says Morningstar. Like any other investment, it can lose money. It dropped 4 percent in a three-week period earlier this year. The overall market, however, fell 8 percent in those fierce three weeks. But that loss was unusual: In the past decade, the fund has had only one negative year.
The fund has been ranked fifth highest among all domestic-hybrid funds for the past five years--there are now more than 500 funds of this type--and third lowest in risk. Its objective is long-term capital appreciation; income is secondary.
Greenspring invests mostly in small companies that few Wall Street analysts follow closely. It looks for a potential the market has not recognized--hard-hit stocks ripe for a turnaround, perhaps, or companies in a sector that is simply out of favor.
Because the fund buys what others ignore, it needs to do a considerable amount of its own research. Carlson spends a lot of time scrutinizing the balance sheets of companies he is interested in as well as their managers. Carlson describes himself as a "hard-core value investor." This is a far cry from most well-known small-company funds, which are generally much more interested in rapidly growing earnings.
Greenspring is unusual in other respects as well. Funds that stress consistency are typically widely diversified; they invest in a large number of companies of varying sizes in a range of industries. By contrast, Greenspring normally holds only about 50 stocks, compared with 130 for the average fund of its type; its assets are largely concentrated in small companies; and recently, it had 40 percent of assets in financial stocks and 20 percent in industrial cyclicals.
Greenspring trades only modestly, however, and that is a feature of steady funds: Portfolio turnover has averaged less than 70 percent a year in the past three years, compared with about 100 percent for the average fund of this type. However, a strategy that goes against the commonly accepted view can easily backfire. Many well-informed people clearly share the market's low opinion of some of Greenspring's holdings.
The fund's success depends on its research. After 10 years of running the fund, Carlson's methods have so far produced results that mix solid returns with low risk. In today's market conditions, that's a recipe many investors will find very palatable.
At A Glance
Fund name: Greenspring
Managed by: Key Equity
Management, Lutherville, Maryland
Total assets: $110 million
One-year returns: 19.4%
Five-year returns: 14.9%
Ten-year returns: 11.4%
Management fee: 0.75%
Phone: (800) 366-3863,
Greenspring Fund, 2330 W. Joppa Rd., #110, Lutherville, MD 21093, (800) 366-3863.