Rah Rah BusinessWeek! A tidy article on some advantages of small mutual funds versus the cheaper behemoths. I'll always root for the little guy even if in 30 years I become the big guy.

  • If you call the Chicago office of the Bruce Fund (BRUFX), chances are one of its two co-managers—Robert Bruce or his son, Jeffrey Bruce—will pick up the phone. They are, after all, the fund's only employees. [Disclosure: I think my father is still an investor in Bruce Fund, he was a few years ago]
  • Jeffrey Bruce thinks that knowing the fund's success depends entirely on him and his father makes a difference. If you have your name on the door, you tend to care a little more, he says.
  • The Bruce Fund is a classic case of what might be called the boutique-fund effect: Small, often family-run mutual fund shops can produce superlative returns. This is especially true if the shop runs only one fund. Instead of selling a multitude of investment products that cover just about everything under the sun, managers at single-fund boutiques devote all of their time and energy to making their one fund succeed. For such managers, running a fund isn't just a job. It's their primary business, their lifeblood. If that fund fails, so does their business. (Amen)

If you've been reading along for any period of time you can see the blurb below is EXACTLY what we do, and why we don't want to be in a Morningstar box. Making money any way possible is the key, or at least not losing it during rough patches.

  • Since their livelihoods are at stake, boutique managers tend to be more risk-averse and holistic in their approach to investing. Instead of investing in a specific sector and trying to beat a specific benchmark, managers often aim to make money any way they can and to keep losses to a minimum.
  • They pursue what is called absolute returns. This requires a more flexible investment style than big fund shops generally allow. A manager may invest in, say, Treasury bonds during a bear market and tech stocks or junk bonds during a bull run.
  • Like the Bruce family, the Sheers practice a flexible, go-anywhere style and try to capture all of the stock market's upside while suffering less of its downside by hedging their positions or going into cash.
  • My father has always worried about the downside, says Adam Sheer. When most people walk into a crowded theater, they think: 'I wonder if this is a good movie.' He thinks: 'My god, what if there's a fire?'

Interesting quote. I often say when one first gets into investing the first question they think of each morning is how can I make money today? 90% of those people get wiped out within a few years. Most of the other 10% who stick at it for the long run wake up each morning asking how can I avoid losing money today? ... and then the gains will take care of themselves.

Of course if your business model is simply to sit as a receiver of globs of money that come in on a weekly basis via 401k contribution, all you care about is getting big, bloated and fitting inside of a Morningstar box. As long as you return +/- 1 to 2% the index you are tracking you are good. You win, and you win big as you acquire more and more of the country's assets under the guise of stability, when you are in fact, de facto, adding little to no value over an index fund. It's actually one heck of a business... but perhaps not such an excellent arrangement for the investor.

  • The best boutique managers invest heavily in their funds. All my liquid assets are in the fund or in separate accounts managed in the same style, says Adam Sheer. The same is true for the Bruce Fund. My father is the largest shareholder in the fund, and I am No. 3 or 4 if you include my wife and kids, who are also invested, says Jeffrey Bruce.

Agree. In the 2008 Barron's article we were featured in - this was discussed. About HALF the mutual fund managers do not have 1 single red cent in their fund; many make hundreds of thousands of dollar a year and can't even throw $50K into their fund. It is startling. Sickening.

  • Many boutique funds, including the Bruce Fund, must be bought directly from the company.
  • If the funds have a drawback, it's that small, undiscovered funds may not gather enough assets to survive. Unsuccessful funds can get liquidated quickly, perhaps not giving managers enough time to prove themselves.
  • But the flexible approach of many of these funds, as well as the large personal stakes their managers often have in them, help tilt the odds in their favor.

Very good point about the liquidation aspect. After my Barron's article last year, I received many emails from managers who congratulated me for getting the type of notice that people with 10, 20 years in the industry did not get. And that was without even having an actual fund... it didn't hit me until all those emails how strategic having visibility really can be. Once up and running, I have a massive advantage to the countless small funds laboring in relative anonymity.

So somehow I've done this backwards - the fame before the fortune ;)