There usually isn't much difference between balanced mutual funds. Most simply allocate about 60 percent of assets to equities -- usually large-cap blue chips -- and 40 percent to bonds. Some also throw some cash holdings in there for good measure.
That's not the way things are done at New Orleans-based Villere Balanced Fund (VILLX). There, on the equity side, fund managers focus on small-cap growth and actively select 20 to 25 of their favorite stocks to include in the portfolio (along with a more standard mix of fixed-income securities).
The small-cap focus has allowed Villere Balanced to stand out from the crowd. It is ranked in the top 1 percent for returns in three-, five- and 10-year time horizons by Morningstar, earning it the rating agency's sought-after "five star" rating. The fund's annual average return for three- and five-year periods is 18 percent.
This year the fund is doing less well, landing only in the 95th percentile with a return of 3 percent. I spoke with portfolio manager Lamar Villere, who attributed the dip to a lag in small-caps. But he suggests that it could be a good time to buy the fund as small-caps return to favor. An edited version of our conversation follows:
Amey Stone: First, let's talk about the market so far this year. We've seen a lot of volatility, including some record highs. What is your outlook?
Lamar Villere: The market has had a pretty good year -- better than most people were forecasting. We think that there is some room for more gains on the small-cap side. We think that is where the value is and long-term growth.
AS: So if you're looking for opportunities, it sounds like some small-cap names might be an area to focus on.
LV: That's what we think. It's tougher to find good names and good risk reward trade-offs, since they are less known, and not household names. But if you do your work, meet with management, really understand the companies -- you can really outperform. It can be a little bit daunting for individual investors, but it's a great place for investors over the long term.
AS: Let's talk about some of the stocks you like now.
LV: One of the companies we like is Sanchez Energy (SN). It's based in Texas and has most of its assets in the Eagle Ford shale region. The company recently acquired 100,000 acres from Shell, which doubled the size of its business. It has been a great holding for us.
AS: What is another stock you can mention?
LV: 3D Systems (DDD), a three-dimensional printer company. They are able to print everything from ceramics, to chocolates, to metals. It's gotten beaten up this year, but we think its long-term prospects are great.
AS: Isn't there a lot of hype surrounding 3D printing?
LV: Yes, the hype cooled off. That's why we think it is a lot more attractive from a valuation perspective now.
AS: Let's try one more.
LV: EverBank (EVER). It's based in Florida, but it's really a national bank that mostly serves its customers online. We think they are ahead of the curve in terms of where banking is going. They don't have expensive branches on every corner. Instead, they pay their depositors a much higher interest rate. We think over time that's the way things are headed, and they are able to pass those savings on to customers. We think that's the right place to be.
AS: Last question -- tell me about your balanced fund, which has an unusual strategy because you emphasize these smaller-cap stocks
LV: Within the balanced fund world, most of our peers have a very diversified approach. They own lots of stocks, lots of big stocks. Our approach is to be much more laser-focused and pick a small portfolio on the stock side of just 20 to 25 of our best ideas where we really have a chance to understand them.
Once you've done the work and you have the confidence, you can hold these stocks for a lot longer. So it also is more tax-efficient than doing a lot of trading with large-caps. We think that's one of the reason that our performance has been what it has been. It's a differentiated approach that seems to be work
AS: What about the risk?
LV: It's certainly more volatile, so there are higher highs and lower lows. But over the long-term, small caps have been proven to be the better-performing asset class.