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Fund Name: Constellation Small Cap Value Opportunities (TSVOX)

Objective: TSVOX holds a broadly diversified portfolio of 100-200 small cap stocks. They describe themselves as having “a value orientation.” Morningstar begs to differ.

Adviser: Touchstone Advisors, which buys funds and sticks sales loads on them. They also sell insurance products.

Managers: Thomas DiBella and Kenneth Gainey from Turner Investment Partners; Ric Dillon and Thomas Schindler from Diamond Hill Capital Management.

Opening date: March 4, 2002; Diamond Hill was added as a sub-adviser in January 2006.

Minimum investment: $2500 for regular accounts, $2000 for IRAs.

Expense ratio: 1.46%. It is not clear what effect the new ownership will have on total expenses.

Comments: There are two strong reasons for paying attention to Constellation Small Cap Value Opportunities.

• This is a very fine little fund, consistently categorized by Morningstar as “small blend.” It has been in existence for just over three years and it has beaten its peer group by 5-6% each year. Its average return over the past three years is 35%, which is in the top 6% of its peer group. The asset base is modest (about $200 million), expenses are reasonable, both of the sub-advisors have strong track records in small cap investing, and it has earned a five-star rating from Morningstar.
  
  

  There are indisputable risks, since no one coordinates the activities of the two managers. It’s quite possible that they’ll tilt in the same direction, making the fund unusually prone to suffer when a favored sector goes sour. Still, these folks have a fine record of results here and elsewhere.

  
  
• Equally compelling, all of the Constellation funds are going to gain sales loads, possibly by the end of June. Constellation ran a nice group of almost 20 funds, all sub-advised by strong institutional money managers. Only 2 of is 18 funds were dogs, most were solidly above average. And all were small. Which might explain why Constellation sold all of its funds to Touchstone Advisors last year. And Touchstone will add sales loads. They won’t say exactly when, but one Touchstone representative suggested that it would be between the end of the second quarter and the end of the third. The general deal is this: investors who join a fund when it was no-load typically are placed into a closed, no-load share class. That is, the “old” investors can continue buying shares without a load but no “new” investors can do so (though no guarantees, of course).

As a result, it would be wise for folks to check these funds out while they still have the chance. In addition to Small Cap Value Opportunities (don’t mistake it for the generally mediocre Constellation Clover Small Cap Value), Constellation offers a solid ultra-short bond fund (Constellation Chartwell UltraShort Fixed Income), a bizarre hybrid fund-of-funds (Strategic Value and High Income, a disturbingly successful combination of small stocks, junk bonds and ultrashort bonds), a really solid growth fund (Constellation Sands Select Growth II), and so on.

Bottom line: It’s hard to find a good, small-cap fund that's open, much less one with well-established institutional managers. This one probably carries more risk than many, but it has a fine pedigree and a strong record.

Company link: constellationfundsgroup.com

May 1, 2006