Small and Little-Known, These Three Are Gems : Investing: Lexington, Evergreen and Seligman are relative midgets. But they are among the past decade’s best performers.
The year was 1935.
F.D.R. was in the White House. Ruth and Gehrig were in the dugout. The Dow Jones industrial average was trading around 100, and the old Corporate Leaders Trust Fund began buying the Depression-battered shares of Eastman Kodak, General Electric, Sears, Roebuck and 27 other companies.
More than half a century later, the fund still owns 23 of those original 30 companies--and little else.
In an era when some fund managers seem to change their portfolios as frequently as their socks, Lexington Corporate Leaders, as the fund is known today, stands as a testament to the merits of long-term investing.
But that isn’t the only unusual thing about this highly unusual investment. It also ranks as one of the most successful and least appreciated funds around.
Which brings us to this week’s topic: undiscovered mutual fund gems.
Of the 25 best-performing funds of the past decade--as tracked by Lipper Analytical Services of Summit, N.J.--three stand out for their small size. Besides Lexington Corporate Leaders, the other two relative midgets are Evergreen Limited Market and Seligman Communications & Information.
How small are they? Each of the three funds has less than $150 million in assets, with Lexington the largest at $135 million and Seligman the smallest at $84 million.
Those numbers might not seem so tiny unless you consider that nearly all of the other top 25 funds count $300 million or more in assets, and roughly half have upward of $1 billion.
Why are these three funds small? Mostly, it’s because of self-imposed closures at one time or another. But all are currently available to new investors. Here’s a closer look at each:
* Lexington Corporate Leaders. This fund identified 30 of America’s bluest chips during the depths of the Depression and decided to retain them as part of a more or less permanent portfolio.
Six stocks have been sold along the way because they no longer met the definition of industry leaders, but 23 of the original companies are still there. (The remaining stock, Praxair, is a spinoff from an original holding, Union Carbide.) About half are components of the Dow Jones industrial average.
The fund is prohibited by its charter from investing in new companies. As such, it does little trading and has no active portfolio management. Another oddity is that it buys an equal number of shares in all its holdings. When new money comes in, it gets apportioned to each stock.
The fund has an impressive long-term record and enjoys a top five-star rating from Morningstar Inc. of Chicago. So why has it had trouble attracting investors?
“The fund really only reopened in 1988,” says Laurence Kantor, managing director of Lexington Management of Saddle Brook, N.J. Before reorganizing that year, it was heavily encumbered by sales charges and wasn’t competitive--although it was available for purchase, Kantor says.
As stock funds go, this one is about as boring as they come. No new holdings. No astute strategies to try to beat the market. No efforts to try to time the market.
But the low-expense, buy-and-hold approach has paid off over time.
“If you’re a conservative stock investor looking for a decent dividend and a portfolio full of household names, this fund might be appropriate,” says Kantor.
* Seligman Communications & Information. This is a sector fund that invests in technology stocks. Over the past decade, it has been the toast of its group.
Particularly impressive is that the fund has placed in the upper half of its peer group in terms of performance in nine of the past 10 years, including first-half 1993 results, according to Morningstar.
But reflecting what Morningstar perceives as above-average risk, the fund enjoys only a three-star rating. Its road has sometimes been a bumpy one, as evidenced by a 31% decline during the third quarter of 1990.
Seligman Communications & Information comes in two classes of shares, offering investors the choice of paying a sales charge up front or over time in the form of marketing fees. The maximum initial charge is 4.75%.
* Evergreen Limited Market. It isn’t unusual for small-stock funds to close their doors from time to time when assets exceed what they think they can manage effectively. Evergreen Limited Market is a case in point.
The portfolio stopped accepting cash on several occasions in its 10-year history. Whether it does so depends on the availability of suitable investments for the fund, says Jessie Emery, director of marketing and communications for Evergreen Asset Management in Purchase, N.Y.
Another factor that has worked against the fund’s growth is minimal promotion by the management company.
“I don’t think we’ve ever done any advertising for it,” says Emery, who’s in charge of advertising.
Evergreen Limited Market just recently passed the $100-million mark on the basis of word-of-mouth recommendations, some good publicity and solid performance. The fund ranks No. 9 on Lipper’s list and stands as the top-rated small-company portfolio currently available to new investors.
It enjoys a four-star rating from Morningstar.
Prospective investors should keep in mind that this portfolio buys especially small stocks--those with market values below $100 million.
The portfolio doesn’t move much in line with the overall stock market and is prone to occasional downdrafts.
As with any mutual fund investments, it’s important to point out that these three might not be able to repeat their superb performance of the past. But since they’re still relatively small and nimble, they at least have a fighting chance of doing so.
Three Small Leaders
Here’s additional information on Evergreen Limited Market, Lexington Corporate Leaders and Seligman Communications & Information--the smallest top-performing mutual funds of the past decade.
10-Year Assets Sales Phone Fund Holdings return (millions) charge (800) Evergreen Small stocks +17.0% $105 None 235-0064 Lexington Large stocks +16.2% $135 None 526-0056 Seligman Technology +16.7% $84 4.75% 221-2783
Note: 10-year total return numbers, for the period ending Sept. 30, 1993, are annualized. Source: Lipper Analytical Services, Summit, N.J.