The 'Boring' Fund That Keeps Crushing The Market
The old saying "You get what you pay for" doesn't necessarily hold true for mutual funds.
#-ad_banner-#Lots of funds that won't let you in for less than $25,000 or $50,000 lag behind the market and their peers. Conversely, many of those with initial investment minimums of $1,000 or less put up long-term numbers most fund managers would envy.
It's pretty ironic, but I'm glad that's the way it is. It's hard enough getting a jump on building wealth without having to come up with a huge wad of cash just to get started. So why should great growth funds be exclusive to those with a lot of money to invest?
Well, they shouldn't. And fortunately, investors can get into one of the world's best growth funds for a mere $500. After that, you can add as little as $100 at a time.
As the following table shows, the fund has beaten the market and its peers by substantial margins in the short- and long-term. And it has often been noticeably less risky than the broader market, as indicated by its beta of 1.0 over the past year.
As the benchmark, the market itself has a beta of 1.0. A beta of less than 1 means a stock or other security is less volatile than the market. The lower the beta, the less volatile a security is relative to the market.
You may have noticed the fund -- Nicholas ( NICSX ) -- is in the mid-growth category. That may be the case officially. But at this point in the fund's five-decade history, it's more like a large-cap fund in many ways, with a favorable risk profile compared to the market being just one of them.
Indeed, large-cap stocks (those with market values greater than $10 billion) account for about 56% of NICSX's $2.7 billion in net assets. As a group, the stocks in the portfolio have an average market value of $20 billion, far larger than the category average of $8.4 billion.
This is partly because some of these stocks ballooned to large sizes over the years. However, the fund recently acquired shares of companies that were large-caps already. One is the $330 billion tech giant Microsoft (Nasdaq: MSFT ) , which NICSX first bought last September.
Faster-growing smaller companies still make up a sizable portion of the fund's assets, though. Indeed, around 40% of the fund is in mid-cap stocks -- those with a market value of $1 billion to $10 billion. About 4% is in small companies, those worth less than $1 billion. Overall, I like the mix of larger and smaller stocks in NICSX because it helps keep risk in check yet also provides plenty of growth opportunities that can continue to lead the fund to long-term outperformance.
Incidentally, only 5% of fund assets are invested in foreign firms, mainly ones located in the U.K. and other parts of Western Europe. NICSX has no exposure to emerging markets.
Here's how the fund breaks out in terms of sector weightings and top holdings:
With a total of only 40 stocks, NICSX is far more concentrated than most equity funds, which often invest in hundreds of companies. However, holding larger positions in fewer stocks can be a big advantage -- provided a fund has loaded up on the right stocks -- because it avoids the dilution of long-term returns often seen with overdiversification.
And based on its performance, NICSX has clearly made the right picks. Top holding Valeant Pharmaceuticals (NYSE: VRX ) , for example, soared nearly 1,000% in the past five years. During that time, the fund's #2 pick, Affiliated Managers Group (NYSE: AMG ) , gained more than 270%, while #3 pick Walgreen (NYSE: WAG ) jumped nearly 120%.
Risks to Consider: Although NICSX is positioned to keep beating the market, rates of return could begin to erode if the fund becomes too heavily tilted toward slower-growing large stocks.
Action to Take --> NICSX is a great growth fund with investment minimums that should make it widely accessible. Because it's a top performer and has a below-average expense ratio (0.76%), shareholders don't have to worry about switching out once they've accumulated enough money to meet the investment minimums of other, "better" funds. NICSX is right up there with the best and can be bought and held for the long haul. Since it lacks much foreign exposure, I suggest using it as a core holding and adding foreign equities to your portfolio if desired.