Dear friends,

It’s surprising how few people seem cheered by the fact that April saw some really solid returns (up about 6% through 4/29) in the U.S. stock market. A bunch of the funds I’ve written about have posted outstanding relatively returns – Matthews Asia Pacific Equity Income, Jordan Opportunity, T. Rowe Price Africa and Middle East, Tweedy Browne Worldwide Dividend Value, Leuthold Asset Allocation, the much-maligned Ariel Focus and FMI Provident are all in the top 1-2% of their peer groups – though only a tiny few have posted decent absolute returns. At the top of that list: Jordan Opportunity with a gain of 8.3% and Price’s Africa fund at 8.1%.

A more ominous sign might be the number of "A" list investors who are well behind the pack: Whitney Tilson at Tilson Focus, Mark Fedenia at Nakoma, David Winters at Wintergreen and Dick Cancelmo at Bridgeway Balanced are all taking a licking. At least some of the evidence suggests that they’re noticeably more defensive than their peers, which cost a lot as the market picked up steam recently. And I also worry when smart people appear to be losing to the rest of us.

Lost amidst the euphoria concerning the reopening of titans such as Sequoia and Dodge & Cox, Wasatch (briefly) reopened two significant, tiny funds. On May 1 2008 Wasatch reopened its International Opportunities (WAIOX) and Microcap Value (WAMVX), both of which had been closed to be new and existing investors. International Opportunities focused on foreign microcaps. The fund was closed because that market was small and subject to unreliable financial reporting. As a result, the managers felt they could best execute their strategy if they weren’t pressured by fund inflows. The fund closed when it reached just $23 million in assets. Microcap Value might be considered a global microcap fund; its portfolio is 70% microcap and about a third is invested internationally. It closed at $66 million. Wasatch reports that the funds had seen minimal outflows but were encountering compelling opportunities that they didn’t have the cash to take advantage of.

Four factors to consider when deciding whether to invest (if, indeed, you still have that choice):

• Both funds have distinctive missions – microcaps are rare in international investing.
\


• Both execute their missions very well – International Opportunities handily outperformed its peers in its only two full years of operation, Microcap Value beat its peers four years running, though both are getting crunched so far in 2008.



• Both funds were closed, tight, just one day after launch



• And both funds are going to be closed again, soon. Andrew Multerer, one of Wasatch’s customer service folks, noted in an e-mail to me that "We do not expect either fund to stay open very long."

While neither qualifies as a "must have" sort of investment – especially given Wasatch’s consistently high expense ratios, both may qualify as "now or never" ones.

Understandably enough, the announcement of a new Global Stock fund from Leuthold roused considerable interest among fund cognoscenti. Leuthold’s rigorous quantitative approach and considerable success with its other funds made Global – its first international offering – particularly intriguing. While initial plans called for a fund launch in late spring, the update suggests that the fund won’t be available before next fall. The Leuthold folks want to be sure that their global trading and settlement relationships are in place and operating smoothly before accepting external cash. Which strikes me as admirable restraint. I’ll pass along updates as they become available.

In early April, investor newsletter tracker Mark Hulbert reported new research on the eternal question: "is it the stocks or the sectors?" Hulbert has been covering "sector rotation" strategies among newsletters for several decades now and portfolios of Fidelity Sector Select funds have routinely outperformed the broad market. Hulbert provides some substantiation from the world of scholarly research in his review of "Mutual Fund Industry Selection and Persistence," a paper by two Emory University researchers. After looking at far too much data, the researchers concluded that about half of a fund’s historic outperformance is determined by sector selection and about half by stock selection. The kicker comes when you look forward rather than back; that is, when you ask whether stock or sector skills best predict future returns. The researchers found that "an adviser with good industry-selection ability was a good bet to continue his winning ways. By contrast, an adviser with good individual stock-selection ability was far less likely to repeat the feat."

The other test is the on-going competition between Leuthold Core (LCORX) and Leuthold Asset Allocation (LAALX). Core and Asset Allocation are managed by the same investment team, have the same investment objective, and follow the same asset allocation. The only difference is the stock select discipline: Core uses a strict sector-based discipline while Asset Allocation uses an equally-strict stock based discipline. That is, Core invests in a basket of stocks in the most attractive sectors while Asset Allocation invests in the most attractive individual stocks that its computers can find.

The results? The best news is that both funds have performed well and both are, as of 4/29/08, making money for their investors. But, for all of the periods that Morningstar reports, the Core fund has substantially outperformed Asset Allocation: over the past month, three months, year-to-date, trailing 12 months, and for 2007 as a whole. While the funds are close so far in ’08, Core returned 19% in ’07 while Asset Allocation returned 11.5%. Over the trailing twelve months, the difference is even larger: 13.3% for Core and 5.3% for Asset Allocation. The results strike me as telling since, so far as I can tell, there’s just one significant difference between the two funds: forest versus trees. So far, forestry is looking like a useful discipline to cultivate.

In a painful example of metaphors gone mad, Barron’s staffer Tom Sullivan went seeking "experienced money managers whose skills keep you in the game . . . [with] solid field play [and] consistent hitting, mostly singles and doubles. . .." He "eschewed those capable of Ruthian blasts." His stance on well-placed streams of tobacco juice, sunflower seed shells and Eephus pitches is not recorded.

In any case, Sullivan’s stars are:

The recent reopening of the legendary Sequoia Fund (SEQUX) after a quarter century led to the agonized realization that Sequoia might no longer be a compelling investment opportunity. With the death of one of its long-time managers, modest performance, an outsized commitment to a single stock and huge embedded tax liability, many investors who had always dreamed of investing in Sequoia suddenly found their bluff called. And they folded. A number of thoughtful posters on the FundAlarm discussion board made a compelling argument for investing in Fairholme as an alternative to Sequoia. They note that manager Bruce Berkowitz is an investor in the Buffett mold with a substantial stake in Berkshire Hathaway. Despite hauling a larger asset base than Sequoia, he’s returned 5-10% more per year using the same investment discipline.

Briefly noted: Madison Investment Advisers cut the expense ratio for two of their bond funds by 40%. As of April 1, Madison Mosaic Intermediate Income Fund (GITMX) will see a significant reduction in its total expense ratio from the current prospectus level of 1.10% to 0.70%. As of May 1, the fund will rechristened as Madison Mosaic Core Bond (MADBX). Likewise, Madison Mosaic Government Fund’s expenses drop from 1.19% to 0.68%. The fund will retain its name, but – for reasons unclear to me – will get a new ticker symbol, MADTX. Both funds are tiny but have, over the past 1-, 3- and 5-year periods, been in the top 10% of their respective peer groups for total return.

Buckingham Asset Management, adviser to the Al Frank Fund (VALUX), just announced the hiring of a new CEO. The move frees former CEO John Buckingham to focus on managing the firm’s two funds while the new CEO works on external relations (i.e., bringing in some assets).

In the month ahead: At the recommendation of Ted the Linkster, from the FundAlarm Discussion Board, I’m investigating the intriguing little Auer Growth Fund (AUERX), and I hope to have a report for you in June. At my Dean’s recommendation, I’m going to be spending some quality time with 64 sets of student research summaries focusing on social values in advertising.

As ever,

David