Mutual Fund Investment Strategy

Mutual Fund Investment Strategy: If You Can’t Beat Them, Join Them

by Mark Skousen, Chairman, Investment U
Friday, September 22, 2006: Issue #584

It’s a fact that 80% of actively managed mutual funds have underperformed the market index over the past 40 years. Index funds, or better yet, fundamental value index funds (as discussed in a recent IU column), are a better way to maximize your stock portfolio.

But there is, in fact, a highly profitable mutual fund investment strategy that takes advantage of mutual funds: Buy the management company that runs them.

Most of these companies have seen a steady rise in sales and earnings, and some have had spectacular, above-market returns. Let’s take a look at a few in particular

U.S. Global Investors Takes Off

I started thinking about this possibility after having lunch last week in Greenwich Village in New York with Frank Holmes, CEO of U.S. Global Investors (Nasdaq: GROW). Holmes heads up one of the fastest growth fund families in the nation. I’ve known Frank and his family for 20 years, and his hard work has finally paid off. His funds now rank in the top 1% of mutual funds in the nation, and new money is pouring into his management company based in San Antonio.

Last week, U.S. Global Investors announced a dramatic rise in fourth-quarter earnings, from $350,000 (5 cents a share) to $5.62 million (74 cents a share). Revenues soared from $5 million to $19 million. The company is famous for its natural resource funds, but Frank has wisely diversified into domestic and foreign equity funds.

Most importantly, his management firm has far outperformed any of its “hot” funds. His U.S. Global Resources Fund (PSPFX) and Eastern European Fund (EUROX) are both up 30% in one year. But the management firm itself is up 420%! (Both U.S. Global Investors and U.S. Global Resources Fund are recommendations in my newsletter.)

Other Mutual Fund Families Doing Well and How To Make Them Part of Your Investment Strategy

Some major fund families, such as Fidelity and Vanguard, are private companies, and therefore aren’t available for investors. But quite a few do trade publicly, including the following giants:

Franklin Resources (NYSE: BEN), which runs the Franklin Templeton funds
T. Rowe Price (Nasdaq: TROW)
and the Janus Capital Group (NYSE: JNS)

For example, T. Rowe Price is up 45% in the past year, and 218% over the past five years, and for good reason. It has an operating margin of 44% and a sales growth rate of 22% – one of the highest in the industry.

Franklin Resources is on a similar trajectory, with operating margins of 33% and a sales growth rate of 18% a year. The stock is up 27% over the past year, and more than 200% in the past five years.

Take a look at Franklin Resources, T. Rowe Price and the S&P 500 over the last five years

Owning Mutual Funds as Investment Strategy

As you can see, it’s a smart strategy to invest in well-managed mutual fund families.

Is Janus a Turnaround in the Mutual Fund Industry?

No investment is perfect. Janus Capital Group (NYSE: JNS) was the darling of the technology boom in the 1990s, and its stock soared to $50 a share. Then the tech bubble collapsed in 2000-01, and Janus lost several of its top managers and suffered huge withdrawals and legal problems. But even Janus is staging a comeback, with sales climbing 11%. The stock is up 28% in the past year.

I asked Frank Holmes if he is worried that his firm will suffer the same fate as Janus Capital if commodities continue to slide. He said he was well aware of this concern, but has dampened the effect of a commodity bear market by:

1) Having his natural resource funds heavily in cash during the recent downturn, and

2) Diversifying into other top-ranked mutual funds (his All-American Equity Fund and Eastern European Fund are ranked five stars by Morningstar). class=”Normal”>For more on how to make leading mutual fund families part of your investment strategy, see the Investment U Crib Sheet below.

Good investing, AEIOU,

Mark

For More On U.S. Global Investors and its outstanding no-load mutual funds, go to www.usfunds.com. Frank, by the way, will be a speaker at Skousen’s CAFE at FreedomFest, July 5-7, 2007. For details, go to www.freedomfest.com.
Tapping Value In Today’s Market Three of The Oxford Club’s top analysts and I recently pointed out several important value opportunities. Take a look at where we expect substantial long-term growth in this special edition of IU – the “Value Investing Forum.”
Uranium Watch – September 22: Another jump in uranium spot prices this week confirms yet again that demand for the alternative fuel source remains strong. At $53.25, uranium is up 42% since January. And while both precious and base metals – from gold to zinc – were hit hard in the correction in May and June, and have traded sideways since, uranium prices have climbed 28% during that time. In fact, they haven’t experienced a single downtick since July 2003.
On Sunday, the Associated Press reported: “Suddenly, nuclear power is back in demand as a relatively cheap, reliable and emissions-free solution to the world’s insatiable demand for energy” – a demand undeniably driven by China. Supply, on the other hand, is dwindling. And the imbalance presents a substantial opportunity to profit. Here’s how.

Today’s Investment U Crib Sheet

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