(PUB) Morningstar FundInvestor

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More of My Holdings The Contrarian | Russel Kinnel

great record. The fund is slightly closed—meaning you have to invest directly through Wasatch to get in. But really, it’s not hard to get into good small-cap funds before they close—you just have to get in before the market has doubled in a short period. In 2009 , virtually every small-cap fund was open. Fairholme FAIRX is like good scotch: best enjoyed in moderation. It’s less than 5% of my portfolio because I’m not willing to bet my retirement on Bruce Berk- owitz being right. He probably will be right, but with more than half the fund in American International Group AIG , Bank of America BAC , and Sears SHLD , this might be the riskiest fund I own. Yes, it’s doing great this year and has been great in six of the past seven years, but that one off year was brutal, and the current portfolio just about guarantees the fund will have another off year. Jensen Quality Growth JENSX is the opposite side of Fairholme. Although concentrated, it is focused on strictly high-quality names so that per- formance is actually pretty mild mannered. It is more growth-focused, too, so you have managers willing to pay a little more for high quality. How- ever, both Fairholme and Jensen are low-turnover, long-term-focused vehicles. American Funds Washington Mutual AWSHX has a dividend focus that makes it an appealing play. I own the cheap R 5 retirement shares ( 0 . 35% expense ratio and no sales load) in my 401 (k). I like the stability of management and the consistency of approach. The yield bias has helped it hold up well in the past two downturns. The fund wants proven dividend payers, and it has balance sheet and income statement standards that all holdings must meet. Although American Funds has seen a lot of outflows, this fund shows why its approach has merit. œ

Last month I shared my top holdings, and I’m contin- uing with that theme by picking up where I left off. As I get deeper, we see some more supporting players in addition to core holdings. Perkins Mid Cap Value JMCVX has struggled during the past five years. Its recent sluggishness has affected its 10 -year record, which lags the Russell Midcap Value benchmark. Its cash stake, a fallout of its valuation-driven process, has weighed on returns in a largely up market. Some problematic stock picks, particularly in the consumer discretionary sector, and an overweighting to energy have also hurt. Perhaps compounding the pressure were inflows from 2008 to 2010 that doubled the fund’s asset base. (The fund closed to new retail investors in 2010 and has since had net outflows.) The team hasn’t changed its investment philosophy, though. It still analyzes a stock’s potential for loss before considering its upside, which has cushioned performance in down markets. And its record since its 1998 inception remains strong. Royce Special Equity RYSEX is one of the easiest funds to own. Charlie Dreifus is a brilliant conserv- ative investor who focuses on companies with clean accounting and cheap stocks. He generally loses less in downturns, so I feel good owning the fund when markets get frothy. I also like that this fund twice closed in a timely fashion, illustrating Dreifus’ commitment to serving shareholders. Dreifus’ other fund, Royce Special Equity Multi-Cap RSEMX , is still open to new investors. Wasatch Small Cap Growth WAAEX also has a seasoned hand in charge. Jeff Cardon seeks out companies with strong cash flow and earnings growth, and he avoids those drowning in debt. Cardon has been running this fund since 1986 and has built a

Our Contrarian Approach I go against the grain to find overlooked funds that may be ready to rally.