Indiana-based mutual funds stage comeback

January 1, 2011

Normalcy has returned to the financial markets, and Indiana’s mutual fund managers are feeling it—for better or worse.

After stock prices fell off a cliff in 2008 and sharply rebounded in 2009, 2010, for the most part, has brought either additional modest gains or stagnation.

Four of those funds are based in central Indiana, and five are based elsewhere but are managed in Indianapolis.

There were stellar exceptions to the mediocrity rule. The biggest standout was Columbus-based Kirr Marbach & Co. LLP’s value fund, which enjoyed returns exceeding the Standard & Poor’s 500 and other benchmarks. Growth in 2010 through November was about 26 percent.

Click here for mutual fund performance.

Another Columbus outfit, Sound Mind Investing Funds, has piggybacked on Kirr Marbach’s success. By investing in the cross-town fund and other high-performing mutual funds, Sound Mind’s flagship fund saw an 11-percent return through November, outpacing the S&P 500.

Also showing significant gains were all five San Francisco-based Wells Fargo funds managed in Indianapolis by a team led by Thomas Pence, formerly of Conseco Capital Management.

For a look at the returns, click here.

But even those examples lack the striking flair of the last two years.

“The rally [in 2009] wasn’t quite as dramatic and fast as the sell-off, but it was close,” said Russ Kinnel, director of mutual fund research for Chicago-based Morningstar. “In 2010, it has been more like a typical market.”

Funds defying the normalcy benefited from not-so-ordinary growth in emerging overseas markets. China, with its healthy reserves, has been free to invest in commodities from countries such as Russia and Brazil to boost its manufacturing economy.

That international growth has helped Kirr Marbach, which has investments in companies that sell into those markets.

“A lot of the companies we own have some overseas exposure,” said Mark Foster, Kirr Marbach’s chief investment officer. “[Domestically] we’re not seeing anywhere near what we’re seeing in those foreign markets.”

The funds that have been less dynamic—Indianapolis-based Archer Balanced Fund and Auer Growth Fund—had investments in some of the worst-performing sectors: health care, utilities and financials. Managers at both funds are optimistic, though, that their funds will roar back strongly in 2011.

Archer managers expect oil and utilities to resurge with a bang and boost their equity holdings.

Bob Auer of Auer Growth thinks the political shift could strengthen his fund’s position. He expects more bipartisan cooperation—and a more pro-business attitude—as politicians forge toward the presidential election in 2012.

Analysts also are optimistic, but they warn that potential growth next year could come with a downside.

“The basic idea is that we’ll have better growth in 2011 ... better but not euphoric growth,” Kinnel said. “The greater threat is that inflation might come back.”•


Auer tracks political cycles

Bob Auer firmly believes in a theory that the U.S. president’s second year has a negative impact on the stock market.

He’s seen the evidence in the performance of his fund, and 2010 was no exception.

Auer’s fund, which outpaced the S&P 500’s dramatic rebound in 2009 after plunging 53 percent in 2008, remained mostly stagnant in 2010.

The growth-based strategy—based on a formula Bob’s father, Bryan Auer, has employed in his personal account since 1987—can be volatile. The idea is to latch onto lesser-known, growing companies at the beginning of their growth and hope the upward trend continues.

On the whole, it has played out well.

Between the account that Bryan opened in 1987 and the fund that launched in late 2007, Auer has averaged a 25-percent annualized return, according to a fund prospectus. But there is a pattern of dips in returns—in 1990, 1994 and 1998—all second presidential years. Auer says it’s not a coincidence; he thinks it’s a reflection of the business climate in Washington that he says is likely to improve as presidents anticipate re-election.

“We seem to be more affected by the cycle than even the market,” Auer said.

Still, he remains loyal to the strategy and optimistic that this year—a third presidential year—will bring better returns.•


Thinking like accountants

Managers at Archer Balanced Fund take an accountant’s approach to investing. They look at balance sheets—meticulously?—scouring for companies with little debt that are producing a strong cash flow. It’s a technique established by the fund’s founder, Troy Patton, who worked as a CPA for Ernst & Young before starting his own CPA firm.

“Studying balance sheets is an art,” said Steven Demas, one of two portfolio managers Patton brought on in the last couple of years before Archer added two new funds to its family. “We go right to the cash flow—that’s where our discipline starts.”

The company’s scrupulous study and stable investments in bonds have helped Archer weather the 2008 storm better than some of its peers. Its losses were 26 percent, less than the 28 percent for others in its category that year.

The fund’s comeback, in turn, has been less dramatic. Last year’s returns were relatively modest as sectors in which Archer is heavily invested—health care and utilities—were among the lowest-performing.

But the value-based strategy has paid off. After the BP oil spill, for instance, the company added to its portfolio of companies that benefited from the cleanup.

Among the new funds Archer launched in December is a stock fund that will cater more to investors willing to take more risk and seeking bigger returns.•


Sound Mind follows ‘best-of-breed’

Sound Mind’s Fred Beerwart says he doesn’t know what to predict about how the stock market will perform in 2011. And he doesn’t much care.

The investment approach at Sound Mind, where Beerwart serves as chief compliance officer, is based on a philosophy that’s less dependent on a particular segment of stocks performing well than some of its peers.

Sound Mind puts its money in other mutual funds that are performing best, based on relatively short-term scoring metrics, and sticks with them until their performance starts slipping.

“It always strives to position you in the best-of-breed,” Beerwart said.

That kind of approach makes Sound Mind more susceptible to short-term corrections. The strategy, which was initially developed as the driving philosophy in a Christian financial newsletter, requires fund managers to wait out the dips until funds fall out of the top quartile.

When the energy market got hammered in 2006, for instance, some of its funds took a huge hit. But managers held on so as not to deviate from the formula.

And it’s not immune to market plunges. The fund declined 40 percent in 2008 but sharply rebounded last year and was up 33 percent.

Last year, it grew about 11 percent thanks in part to its investment in strong-performing fellow Columbus fund Kirr Marbach.•


Kirr Marbach likes old-school

The investment approach at Kirr Marbach can be summed up pretty succinctly: find cheap stocks that are anticipated to go up.

“It’s a little old-school,” Foster said of the strategy, “but it works for us.”

It wasn’t working so well in 2008, when the fund saw a near-45-percent decline, but Foster and other managers stuck to the strategy, and for the last two years it has paid off.

Last year, the fund’s growth was almost double that of others in its category of funds with a mix of stock sizes. The Wall Street Journal also ranked the fund first in its category based on year-to-date and one-year returns through the end of October.

Foster attributes this year’s success to growth in emerging markets such as China, India and Brazil. Some of the companies in which Kirr Marbach invests, such as cargo-air company Atlas Air Worldwide and handbag maker Coach, have increased their presence in those markets.

Also helping is the fund’s investment in businesses that boom in a recession, such as discount-store parent Dollar Tree and Autozone.

But the benefit from the recent trends hasn’t shaken Kirr Marbach’s dedication to its essential strategy.

“We’re looking at things we think have good growth potential,” Foster said, “just not reflected in the stock price.”•


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