It's hard to pick a great mutual fund. By now, everyone knows that past performance is no guarantee of future performance. But, somehow, the editors at The No-Load Fund Investor make it look easy with a somewhat naive and speculative strategy that has managed to yield annual returns of nearly 14 percent over the past 15 years. Mark Salzinger spoke to Registered Rep. about it.
Registered Rep.: How does this strategy work?
Mark Salzinger: Every January, we have been doing something called “persistency of performance.” We look at non-sector stock funds and rank them for their performance for the year just passed to see which is the best one. And if it's still open to new investors and it's not a leveraged fund, we will pick it. It's not a diversified portfolio. This is for someone who has a few thousand dollars lying around and wants to make a speculative investment; it's mad money.
RR: Who is it this year?
MS: FBR Small Cap (FBRVX), which is a small-mid blend fund. Friedman Billings Ramsey runs it, but it's sub-advised by Akre Capital Management. The fund gained 28.5 percent in 2006, and it just reopened to new investors. It's not a sector fund, but it is technically non-diversified. It can have quite a bit of its assets in just a few stocks. Still, its performance has not been volatile. The manager looks for stocks with high returns on capital and a management team with a history of acting in the best interests of all the shareholders. He wants companies that have opportunities to invest their free cash flow or excess profits at high returns in similar lines of business or assets.