Zeke Ashton knows a thing or two about playing defense. In 2008, for instance, his Tilson Dividend Fund beat the market by 18 percent. Meanwhile, for the trailing three years, the fund's returns land it in the top 1 percent of Morningstar's mid-cap blend category.
By any measure, it would seem that Tilson Dividend has a lot to brag about. But it chooses not to. "We don't have an affiliated broker dealer," says Ashton. "We are very small, and we rely entirely on referrals for new investors. And we don't have a marketing budget, so we haven't spent any money marketing." As a result, despite its superior performance, Tilson Dividend has just $10.7 million under management. In the $11 trillion mutual fund industry, that doesn't even qualify as a blip on the radar.
In many ways, Tilson Dividend is the prototype for the small but successful fund struggling to differentiate itself in what has turned into an incredibly crowded field. According to Morningstar, there are currently 6,735 distinct mutual funds (excluding money market funds).
Given the sheer size of the fund universe, it's impossible for any one investor—or even one firm—to be familiar with every fund. From a practical standpoint, that means that in the fight to catch the attention of registered investment advisers or to nab one of a limited number of spots on brokerage platforms, products from big-name fund shops have a distinct advantage. Meanwhile, smaller funds often go unnoticed.
"If you go back and look at the '90s, [back then] you could go directly to shareholders and talk to them about your products and your style," says Jay Sekelsky, a comanager of the Madison Mosaic Disciplined Equity fund. "These days there's always an intermediary. ... And so trying to get shelf space, or trying to get people to notice you, is often difficult."
Put another way, it's a Catch-22: In order to get noticed, a fund has to be big. But in order to be big, it has to get noticed.
With that in mind, here are 10 great funds you've probably never heard of. All of them are small funds (only one has more than $100 million under management) that receive at least an 8 out of 10 using U.S. News's recently unveiled Mutual Fund Score.
Tilson Dividend (TILDX). This isn't your typical equity income fund. Unlike most of its peers, which focus exclusively on dividend-paying stocks, the fund frequently uses covered calls to supplement its goal of providing investors with current income. A covered call works like this: The fund enters into a contract with a buyer in which the fund agrees to sell a security if that security reaches a certain price. In exchange for the right to purchase the security at an agreed-upon price, the buyer pays an upfront fee, and this provides investors with current income in much the same way that dividends do. That's not to say dividends aren't important to this fund. But since they're not its sole focus, Tilson Dividend has the flexibility to be more selective in its stock picking. Meanwhile, the fund currently has around 20 percent of its assets in cash. "With the market having performed so strongly, we've been doing more selling than buying, and we've been very patient about redeploying that capital," says Ashton, who comanages the fund.
Madison Mosaic Disciplined Equity (MADEX). For Disciplined Equity's management team, investing is all about stock picking. To neutralize sector dynamics, the fund keeps its sector weightings almost identical to the S&P 500's. That means all of the fund's relative outperformance stems from superior stock selection. "In general, we're looking for companies that are growing faster than the market but yet have higher-quality balance sheets, strong management teams, sustainable competitive advantages, and … reasonable valuations," says Sekelsky. The fund generally owns between 50 and 60 stocks and tends to hold on to them for the long haul. Sekelsky and his team prefer conservative blue chips that have proved their potential over the years. "You're more likely to see a Johnson & Johnson in the portfolio than a biotech company, for instance," Sekelsky says.