At the FPA Paramount fund, Eric S. Ende maintains one sector-specific rule: he shuns the stocks of banks and insurers.

THE Standard & Poor’s 500-stock index returned nothing in 2011, but a lost year overshadowed a late rally. Managers of three of the fourth quarter’s better-performing mutual funds found winners in such varied places as small-capitalization stocks, auto parts retailers and aerospace companies.

Buying What They Like

Robert E. Killen and Lee S. Grout, co-managers of the Berwyn Fund, call themselves contrarians but might be better termed investment agnostics, as they pay little attention to such orthodoxies as benchmarks and broad diversification. Instead, they buy what they like, sector weightings be damned. If they find themselves with, say, lots of industrial stocks, so be it. They just want companies — typically about 40 — that meet their quality screens.

“We own a collection of really good businesses,” Mr. Grout said. “Beyond that, there’s no grand plan.” Their fund, which holds mainly small-capitalization stocks, carries an expense ratio of 1.26 percent and returned 19.7 percent in the fourth quarter.

Lately, Mr. Killen and Mr. Grout’s willingness to go where other investors won’t has led them to Winnebago Industries, the motor home maker. When they invested, the stock had sagged for fear that high gasoline prices and a soft economy would sap sales. Prices for the company’s campers start at about $70,000 and climb to more than $300,000, and the weak economy had driven several competitors to bankruptcy. But Winnebago, which carries no debt, was protected by its well-known brand and sturdy financials, Mr. Killen said.

One unifying factor in the portfolio is its companies’ distaste for debt. Mr. Killen and Mr. Grout prefer businesses that can finance their own expansions and acquisitions and don’t have to rely on the capital markets, particularly in times of stress.

Read More: http://www.nytimes.com/2012/01/08/business/mutfund/three-mutual-funds-at-the-front-of-a-late-2011-rally.html

H/T: Value Investing World

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