Top Boutique Mutual Funds: Consensus Stock Picks ? Investing Daily

In my nearly eight years at the Hulbert Financial Digest, one of our analytical approaches was to examine the portfolios of top-performing newsletters to see which securities they held in common. While no one can predict the future, we believed that the consensus recommendations from long-term market beaters were more likely to outperform the market than not. And at the very least, it was a simple way of identifying names that might merit further investigation.

I?ve performed a similar survey of top mutual fund holdings in a past column. But this time around, I wanted to examine the stocks most commonly held among the dozen mutual funds I?ve profiled over the past year in issues of Benjamin Shepherd?s Wall Street as well as the former Louis Rukeyser?s Mutual Funds.

In these publications, I look for mutual funds that beat the broad market as well as their benchmark over the long term, while incurring less risk than their benchmark. Additionally, I favor funds that have seasoned management teams that invest with conviction, which tends to reduce portfolio turnover. Finally, I try to avoid writing about the mutual funds that everyone already knows about, so I tend to focus on funds managed by boutique firms instead of those offered by fund giants such as Fidelity and Vanguard.

The funds I?ve selected span all styles and capitalizations, from small cap to large cap and growth to value. And many of them have a bit of a contrarian streak. One example of such a fund yielded by this process is Wasatch World Innovators (WAGTX), which I profiled last week.

Just as I avoid writing about the funds everyone already knows about, I?d like to dispense with focusing on large-cap names in favor of small- and mid-cap names. But if you must know, the two large-cap stocks that were each held by three of the twelve mutual funds in my study are Intel Corp (NasdaqGS: INTC) and Pfizer (NYSE: PFE).

For a small- and mid-cap name to make this shortlist, it had to be held by three or more of the mutual funds I?ve previously analyzed. The six names are as follows:

Stratasys (NasdaqGS: SSYS)

Raven Industries (NasdaqGS: RAVN)

CARBO Ceramics (NYSE: CRR)

FactSet Research Systems (NYSE: FDS)

Ritchie Bros. Auctioneers (NYSE: RBA)

Zipcar (NasdaqGS: ZIP)

And the one mutual fund that holds all six names is Conestoga Small Cap (CCASX). This fund?s management team takes a risk-averse approach to security selection, which helped limit the magnitude of its losses during the 2008-09 Great Recession. That?s enabled the fund to produce steadier returns over the long term. In fact, it?s demolished both the market and its average small-cap growth peer, with a total return of 173.2 percent over the nearly 10 years since the fund?s inception in October 2002. By comparison, the average small-cap growth fund in Morningstar?s universe gained 136 percent over that same period, while the S&P 500 returned 110.6 percent.

All six of the aforementioned stocks are largely out of favor with the market at the moment and are trading well below their 52-week highs. In fact, four of these stocks have actually dropped in value year to date.

Stratasys is the one stock that has demonstrated strong price momentum relative to the market over the trailing three-month and one-year time periods. Conestoga first picked up shares of the 3-D printing specialist in the third quarter of 2011, during which it fell as low as $18.51 per share. Shares of Stratasys then rocketed as high as $73.32 in late August, but faltered in recent weeks ahead of its pending merger with the privately held Israeli firm Objet. Conestoga took profits recently on about a quarter of its stake in Stratasys.

The performance of these stocks suggests the importance not just of determining which names are most commonly held among top performers, but also which ones were added to the portfolio relatively recently. Although the five other names listed above may very well still trade near the prices at which the funds initiated their positions, it?s possible that each management team?s investment thesis may have changed since then. For example, Conestoga recently halved its position in Zipcar, and the stock now occupies the smallest percentage allocation in its portfolio.

With that in mind, I reviewed Conestoga?s most recently reported holdings (as of Aug. 31) to see if any new names had been added to their portfolio. Although there were no new additions to its concentrated portfolio of 47 stocks, there were two positions that were boosted significantly. The fund more than doubled its position in SciQuest (NasdaqGS: SQI), which specializes in ?software as a service? solutions for contract management and procurement. Meanwhile, it boosted its holdings by 50 percent in unmanned aircraft systems designer and manufacturer AeroVironment (NasdaqGS: AVAV).

In the months to come, I?ll continue monitoring the holdings of the top-performing mutual funds and report on those findings in this space.

What do you think of this article? Please post your feedback in the ?comments? section below!

Source: http://www.investingdaily.com/15694/top-boutique-mutual-funds-consensus-stock-picks

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