Five small, so-called forgotten winners lurk in Morningstar's annual list


With all the attention paid to mutual funds these days, some good ones still slip by.

Maybe it's because more than 5,000 funds are vying for attention. Or maybe it's a matter of marketing. Or just bad luck.

The bottom line: There are a few small winners waiting to be discovered. And because more and more good funds are shutting out new investors, it's worth investigating these so-called forgotten funds.

There are five such funds on the sixth annual list as compiled by Morningstar Inc., the fund research company in Chicago. Each holds less than $125 million and has had the same manager for at least three years.

Three offer alternatives to leery bond-fund investors. For stock investors, there is a conservative equity pick and a more aggressive one.

The $102 million Loomis Sayles Bond Fund walks its own path, Morningstar said. Its returns differ greatly from the U.S. corporate bond market, given the investments made by its manager, Daniel J. Fuss, in discount-priced bonds, convertible holdings and foreign debt.

"We're not much of a believer in market forecasting," he said. "We're bond-pickers."

His typical investor: his father-in-law, who invested all his retirement money in the fund and lives off the income. The fund yields just over 9 percent.

The portfolio sports an average credit quality of BBB, just above junk-bond level, and its maturity now averages 20 years.

While the fund is less than 4 years old, "its prowess in both bull and bear markets, along with unusual breadth, give us a good dose of confidence about its future," Morningstar wrote.

Michael C. Brilley has managed the $36 million Sit U.S. Government Securities Fund since its 1987 inception. It owns government issues only and yielded 6.84 percent in January. Mr. Brilley says his goal is to "position ourselves as a more conservative bond investment with a fairly intermediate duration," now about 2.2 years.

That's lower than usual for the fund, which currently has higher-than-usual investments, 10.9 percent, in Treasury bills, waiting for the market to rise another 10 to 15 basis points, or hundredths of a percentage point, before reinvesting.

"We look for a modest increase in inflation, to about 3 1/2 percent by year-end," Mr. Brilley said.

A big chunk of the fund -- 70 percent -- is in Ginnie Mae manufactured housing pass-through certificates, loans for buyers of mobile homes. These are less volatile than conventional Ginnie Maes because prepayments are rare and the loans are smaller.

Edward A. Killen helped his brother, Robert, research investment for 16 years and signed on as official manager of the $63 million Berwyn Income Fund in June.

Berwyn can keep no more than 25 percent of its holdings in common shares; otherwise, Mr. Killen can pretty much do what he wants.

He describes Berwyn as "relatively defensive, a complement to an equity fund."

Fund shareholders agreed to let him invest in junk issues last June, and that is where most of his corporate exposure is now. "We feel that the credit risk is less than the principal risk in higher-grade securities," he said.

Despite the tremendous correction in Treasuries in 1994, he says "the basic industry economy is very strong." The fund's largest two sectors are computers, 12 percent, and oil and gas, 10.3 percent.

Convertible securities account for 43 percent of the fund, which recently yielded 8.2 percent. Common stocks, 18 percent of holdings, include Occidental Petroleum and A. O. Smith, a maker of frames for utility vehicles.

The $105 million Franklin Equity-Income Fund stands out because it relies on high-dividend-paying stocks and convertible preferred shares, not bonds, to create its income.

The fund recently yielded 5 percent. Its co-managers, Frank M. ++ Felicelli and Douglas Barton, seek blue-chip stocks yielding at least 25 percent more than the market.

Their biggest sectors are utilities and basic materials, both 15 percent. The biggest holdings: Chemical Banking, Hanson PLC and GTE.

The $80 million Wasatch Aggressive Equity Fund is not a "gunslinging, churn-or-burn fund," its manager, Samuel S. Stewart Jr., says. Wasatch's 1994 turnover was just 40 percent.

Mr. Stewart looks for small growth companies with "an identifiable and sustainable advantage in markets where they have room to at least double the size of the company in at least five years."

Its biggest holdings are Loewen Group, a British Columbia company with 80 percent of its funeral-home-consolidation business in the United States; U.S. Cellular, in Chicago, and Heilig-Meyers, a furniture store chain in Richmond, Va.

Mr. Stewart cheered last year's bad market. "We're finding plenty of companies in the current environment," he said, "given the fall in prices."

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