Fund Name:
FMI Provident Trust Strategy Fund (FMIRX)Objective: This is a non-diversified equity fund which seeks "high total return." They typically own fewer than 40 stocks, 18 currently. They can invest in any market cap above $1 billion, but are currently heavily invested in larger, growth stocks. While they are primarily an equity fund, they are willing to use bonds and cash as tools for limiting volatility and as shelter in bear markets.
Adviser: FMI Funds. Fiduciary Management, Inc. is a Milwaukee-based firm founded in 1980. It manages $3 billion, half in four retail funds and half in two institutional ones.
Manager: J. Scott Harkness and Michael Schelble, both Principals of Provident Trust.
Opening date: December 30, 1986; the current adviser (FMI) took over the fund in 2001 and selected the current sub-advisor in September 2002. Before that, it operated as the AAM Palm Beach Total Return fund (???).
Minimum investment: $1000 for both regular and IRA accounts.
Expense ratio: 1.0% after fee waivers; 2.23% without the waivers. The waiver is in effect through September 2006, but such waivers are generally extended.
Comments: FMI offers four retail funds, three of which are solid offerings with reasonable expenses and reasonable asset bases. The most interesting is FMI Provident Trust. While the fund is 20 years old, it wasn’t adopted by FMI until 2002. Its preceding history is spotty, but its subsequent performance has been outstanding. It has returned better than 23% per year under its current managers, placing it in the top 2% of large growth funds. It has achieved those results with consistently below- average risk. It has, for example, been about a third less volatile than either the S&P Midcap 400 or the S&P500, while outperforming both.
Such accomplishments are notable given its portfolio: It holds just 18 stocks, about 40% of its assets are in midcaps, and its sector weighting bears no resemblance to either of its benchmark indices. The portfolio is constructed in two steps:
First, there is a top-down decision about asset allocation between stocks, bonds (US government debt and investment-grade corporates) and cash. The bond portion of the portfolio is also subject to a top-down judgment about target maturities.
Second, there is a bottom-up judgment about individual securities. The managers are pretty closed-mouth about their selection process. They profess a fondness for 800-pound gorillas, "self-funding, dominant market share distributors of good deflation" and "high-quality companies with strong revenue and earnings growth" that can thrive in a slowing economy. From their letters to shareholders, it’s pretty clear that they have a disdain for "infinite p/e" companies, and are committed to outperforming their peers over the course of a market cycle that includes a substantial correction.
Bottom line
: Investors crave focused funds because they offer the potential to escape the ills of a direction-less, mostly range-bound market. The downside to a compact portfolio is the greater risk of being sunk by even one or two really bad choices. FMI Provident seems uncommonly aware of those risks and seems committed to using both asset allocation and security selection to moderate them. Given a tiny asset base, good advisor, and a pretty low expense ratio (assuming that the waiver stays in place), this seems like a fund that risk-conscious growth investors might want to examine.Its sister fund, FMI Large Cap (FMIHX), is almost as concentrated, is run by FMI’s founder, and offers a similarly sensible choice.
Company link: http://www.fmifunds.com/provident.html