Bull & Bear's Mutual Funds

       Sheldon Jacobs: "We look closely when companies launch new funds to be run by successful, experienced managers. Such funds often produce their best-performance in their earliest stages.
        Management has the most flexibility early in a fund's life. A new fund's small asset pool allows management to invest in its favorite ideas without moving the market, diluting the portfolio with weaker options or bumping against ownership limits.
        In late March, Artisan Partners launched Artisan Opportunistic Value Fund (ARTLX), managed by Scott Satterwhite, Jim Kieffer and George Sertl. Satterwhite and Kieffer, assisted by Sertl, also run two closed funds: Artisan Small Cap Value (ARTVX) and Artisan Mid Cap Value (ARTQX). These older funds have produced superior performance. Small Cap Value gained 17.5% annually over the five-year period ended March 31, 2006, vs. 16.2% for the Russell 2000 Value Index. Mid Cap Value gained 16.5% annually over the five-year period, vs. 14.7% for the Russell Midcap Value Index.
        Opportunistic Value has above-average flexibility and concentration within a diversified structure. The managers can invest in stocks with market capitalizations of at least $1.5 billion. They can invest up to a quarter of the fund's assets in foreign stocks. With three quarters of the portfolio, the fund may invest in up to 5% of a single company's stock (measured at the time of purchase). With the remaining quarter of assets, the fund can invest up to 10% at purchase in a single position. (That means 10% is the maximum position size for the entire fund). The managers expect the fund to hold 30 to 40 stocks at any one time, and cash will be limited to a maximum of 15% of total assets.
        We at the Investor believe that large-cap value stocks are more attractive now than small and midsize value stocks. After six-plus years of lagging performance, large value stocks have seen their valuations plummet relative to those of smaller companies. This is due in part to overcompensation from investors in response to the late-1990s mania in large-cap stocks. After overshooting to the upside and driving up large-cap valuations in the late 1990s, investors have now overshot to the downside. Despite 13.4% annualized growth in per-share earnings over the past five years, the companies in the large-cap Russell 1000 Value Index have a price/earnings (P/E) ratio (at the end of March) of only 14.9. The Russell 2000 Value and Russell Midcap Value indexes have significantly higher composite P/Es (19.1 and 17.2, respectively) despite slower earnings growth in their stocks.
        Satterwhite, Kieffer and Sertl also think large-cap value stocks are undervalued, so large-cap stocks currently account for close to 80% of the assets of their new fund. While they expect that the fund will have some exposure to large companies most or even all of the time, they stress that the fund's market-cap profile will fluctuate based on where they find the best opportunities.
        Satterwhite, Kieffer and Sertl look for value investments among quality companies. Specifically, they look for stocks whose P/Es are in the low-teens or below based on normalized earnings power - i.e., once the company's earnings recover to normal after a hiccup or a downturn. On the valuation side, they combine this tool with an analysis of the company's market value as compared with the value of its cash flow and ability to accumulate cash. They are intrigued when these valuation measures are near or even below the bottoms of their reasonable valuation ranges for the specific stock in question.
        From among statistically cheap companies, the managers favor ones that can increase in value over time. They ask themselves some of the same questions a private businessperson should consider before buying a business: Can this purchase candidate's money be reinvested in its business at attractive rates of return? Will the candidate's cash flow increase and accumulate over time? Is the candidate's debt level manageable? If the answers are yes, Satterwhite, Kieffer and Sertl may purchase the stock for one or more of their funds.
        After several years of a strong economy and excellent corporate performance, investment anomalies are rare today, so there are few 'screaming' buys available for value investors. There are, however, many companies that have been performing well operationally but not getting much respect from investors. In fact, some of America's best companies are selling at considerably below-average valuations. So, while value funds often invest in medium or even lower-quality companies, Satterwhite, Kieffer and Sertl have filled Opportunistic Value with attractively valued, 'best of breed' companies that lead their industries. Besides providing the likelihood of an attractive risk-adjusted return over time, this current positioning should protect investors somewhat if consumer spending slows, interest rates continue to rise or the market just turns down.
        Because the managers are 'bottom up' investors who don't cling to an index, industry weightings within Opportunistic Value are likely to be 'lumpy,' with large weightings in some areas and no exposure in many others. Currently, for example, large property/casualty insurers, specialty-finance companies, banks, technology firms and various consumer-oriented firms account for significant chunks of assets. While two stocks accounted for nearly 10% of assets combined of the fund at the end of March (a complete list of holdings as of March 31, can be found at www.artisanfunds.com), many of the fund's 33 recent holdings accounted for between 2% and 3% of the fund's assets. The largest holdings add ballast to the fund; they tend to be the ones in which the managers have the most confidence of the steady compounding of value over time. Though these holdings may have less risk, some of the fund's smaller holdings may have even more potential for capital appreciation.
        Though Satterwhite, Kieffer and Sertl have considerable experience picking large U.S. value stocks for institutional accounts, they haven't done as much foreign investing. In time, Kieffer says, they will leverage the international expertise within Artisan, which includes two solid funds (one of which, Artisan International Value, we include in various Best Buys portfolios) as well as an emerging-markets team recently hired from another firm. For now, however, Opportunistic Value is likely to focus almost exclusively on U.S. stocks.
       With their older Artisan funds, Satterwhite and Kieffer haven't hesitated to sell a holding if they're wrong on its fundamentals or its valuations rise to 'demanding' levels. Generally, however, they are patient, low-turnover investors whose funds have been relatively tax-efficient. We expect the same with Opportunistic Value.
        Through Opportunistic Value's current estimated expense ratio of 1.48% is higher than we'd like, this new fund is exceptionally attractive for its flexibility, current positioning, established investment process and managerial superiority. We recommend it highly for aggressive, moderate or conservative investors.
        The fund's minimum initial investment if purchased directly from Artisan Funds (800-344-1770) is $1,000. The fund's minimum is $2,500 if purchased through various fund supermarkets, including Fidelity Brokerage and Schwab."