Though Small and Quiet, Founders Gets Results

RUSS WILES, <i> a financial writer for the Arizona Republic, specializes in mutual funds. </i>

It might be a fluke, a coincidence or just plain luck, but the Founders funds group at the moment can boast of an unrivaled record of consistently good performance.

The Denver company manages 11 mutual funds with a combined $2 billion in assets. Of these, seven have been evaluated for risk-adjusted performance by Morningstar Inc., the Chicago monitoring service, and each of the seven enjoys an “above average” grading.

No other group with at least that many funds has “above average” or better scores on all its portfolios.

New York-based Value Line, which operates a rival rating service, doesn’t give such consistently good marks to Founders’ funds. But overall, it grades them nearly as well, using somewhat different measures of risk and return.


What’s important isn’t the exact ratings on Founders’ funds but the fact that the company has been able to achieve respectable results without much fanfare.

Founders’ $2 billion in combined mutual fund assets doesn’t even place it among the 100 largest fund groups.

“We haven’t put a lot of emphasis on marketing and public relations,” says Bjorn K. Borgen, Founders’ president and majority owner.

While asset growth can help a fund group operate more efficiently and attract better talent, too much growth can prove to be a hindrance if it affects the firm’s ability to deliver good results, Borgen says, adding that the company currently has no plans to add new funds.


Borgen probably introduced more change to the sleepy company than anyone else.

He joined Founders as chief investment officer in 1969, three years out of Harvard Business School, and he bought a controlling interest in the mid-1970s. Since then, the group has introduced seven of its 11 funds and switched from a load to a no-load format. Founders’ tenure in the mutual fund business dates to 1938.

Borgen argues that his firm’s good marks are not a result of luck or coincidence, but rather an investment approach that stresses teamwork and collective incentives.

The company follows what it calls a “team and lead manager” system, where each fund manager and analyst cover a different set of industries. Founders’ investment pros share ideas, but each lead manager has the final say on his portfolio’s buy and sell decisions.


When a fund outperforms its peer group, an incentive bonus is paid to the entire investment department, which also includes traders, statisticians and support personnel.

“The lead manager will get the biggest slices, but the others will also get a piece of the pie,” Borgen says. “So there’s an incentive for everyone to assist everyone else to do well.”

Founders managers follow a “bottom-up” investment philosophy, which means they spend their time searching for promising stocks rather than trying to predict market swings. Founders likes to buy growth companies with superior earnings potential, solid management and dominant products.

Favored themes today include technology companies that sell productivity-enhancing goods and services, telecommunications firms and selected retailing stocks.


Even without a market timing emphasis, the Founders funds will start to fill up with cash when their portfolio managers can’t find good buys. Currently, the funds have higher-than-normal cash positions, Borgen says.

If Founders has a glaring weakness, it’s a lack of good fixed-income investments from which to choose. The company offers nothing in the tax-free bond area and has just two products in the taxable arena: a new and unproven global bond fund and a lackluster government bond portfolio. Morningstar hasn’t yet rated the latter, but Value Line gives it a “lowest” rating for risk-adjusted performance.

Also, pure no-load enthusiasts might not like the fact that Founders charges a 0.25% annual 12b-1 fee, for marketing-related expenses, on its funds. The company’s products tend to have slightly higher expenses than their peers.

As another modest negative, investors should realize that Founders’ stock funds tend to be fairly volatile, says Sheldon Jacobs, editor of the No-Load Fund Investor newsletter in Irvington, N.Y.


Still, Jacobs agrees that the company’s reputation is a good one, and he gives high marks to its Balanced, Blue Chip, Frontier, Growth and Worldwide Growth funds.

Stephen L. McKee, editor of the No-Load Mutual Fund Selections & Timing Newsletter in Dallas, says Founders Growth has been an outstanding performer over the last couple of years. He also likes the company’s Balanced and Blue Chip funds.

In an attempt to make its products more popular among investors, Founders recently dropped its $10 annual fee on individual retirement accounts for fund holdings of at least $5,000.

The company has also made its funds available through the no-transaction-fee programs offered by discount brokerages Fidelity Investments and Charles Schwab. These programs are a low-cost way for investors to consolidate their many different fund holdings in a single account, McKee says.



The war continues to heat up among discount brokerages that allow investors to buy or sell no-load mutual funds without a transaction fee. Boston-based Fidelity Investments in early May added 130 funds from 23 groups to FundsNetwork, its no-transaction-fee program. Federated, IAI, Montgomery, United Services and Warburg Pincus are among the families now participating.

With the change, a total of 328 funds from 33 families are available through Fidelity without a sales charge or other trading expense. Rival Charles Schwab, based in San Francisco, has 251 funds from 27 families available through OneSource, its no-transaction-fee program.

Such programs allow investors to consolidate their holdings under one roof for no additional charges. The fund companies pay a 0.25% annual fee to compensate the brokerages for trading and administrative expenses.


Separately, San Diego-based Jack White & Co., which offers a no-transaction-fee program of its own, is lowering its minimum investment on some funds in the program to $250 from $5,000.

Model of Consistency

The Founders mutual funds group of Denver has achieved unusually consistent investment returns. Of the seven Founders funds rated by Morningstar for risk-adjusted performance, all enjoy “above average” marks.

Size Morningstar Fund Type (millions) Began rating Balanced Balanced $87 1963 Above avg. Blue Chip Growth-income $307 1938 Above avg. Discovery Small stock $201 1989 Above avg. Frontier Small stock $250 1987 Above avg. Growth Growth $381 1962 Above avg. Special Aggressive growth $394 1961 Above avg. Worldwide Growth Global $86 1989 Above avg.