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Originally published Saturday, October 29, 2011 at 10:01 PM

Your Funds

Chuck Jaffe: Big-name manager opens new funds amid big challenges

Robert Gardiner has been a home-run hitting fund manager, and Blake Walker is no slouch, either. Combined with the lure of new funds in general, their new Grandeur Peaks funds sound great until you factor in that Gardiner made his reputation in small-cap stocks, a sector of the market that has been hurt more than most.

Syndicated columnist

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Say you could be one of the first investors into a new mutual fund by one of the greatest money managers of the past two decades. No big restrictions, no impediments, no gigantic initial minimums.

Now say that the manager has made his money in one of the realms of the market that currently looks least attractive, the kind of thing you might well stay away from if it weren't for a famous manager opening the doors to a new fund.

That's precisely the quandary facing investors who have heard about the new Grandeur Peaks mutual funds managed by former Wasatch portfolio managers Robert Gardiner and Blake Walker. They have to balance the enticement of a new fund and a star manager with the idea that the fund is likely to specialize in small- and micro-cap investing at a time when that arena has been hammered by the market.

Truth be told, it's a real question how many investors will notice, let alone be willing to take a flyer on a new fund regardless of its pedigree. A few weeks ago (Oct. 2), I pointed out that the days of star managers appear over, done in by asset allocation and money-management theories that effectively put straitjackets on managers and limit them to tight market niches. Underlying my thinking in that article was the fact that not a single investor had written to see if I knew when Grandeur Peaks would open funds.

In short, Gardiner's new funds appear to be mostly off the radar.

The question for investors is whether they should be ready to pull the trigger with the new funds squarely in their sights.

By virtually any measure, Gardiner is a bona fide star. His work at Wasatch Micro-Cap (WMICX) made the fund the single-best performing fund in the industry from the day it opened in 1995 through his departure at the end of 2006. (Full disclosure: I bought Wasatch Micro-Cap shortly after it opened and still hold it). Wasatch Micro-Cap Value (WAMVX) was in the top 10 percent of its peer group from when he opened it until he left in 2008 and started Wasatch Global Opportunities (WAGOX).

At his last fund at Wasatch, performance was better than 98 percent of the funds out there; the average mutual fund returned just under 20 percent from November of 2008 through June of 2011 according to Morningstar, but with Gardiner at the helm over that time Wasatch Global Opportunities nearly doubled that.

In short, at every turn — including a stint at Wasatch Small Cap Value (WMCVX) — Gardiner has been a home-run hitter.

Walker's no slouch either; he's got a record that would make most managers envious.

Next, there's the appeal of Grandeur Peaks Global Opportunities and Grandeur Peaks International Opportunities — Gardiner's soon-to-open funds — being new. Most analysts believe in studies that show the existence of "new fund phenomenon," which is the idea that new funds do particularly well when they are small and nimble. Managers can put their money to work in their best ideas, and the fund tends to be focused, conditions which can change as the fund grows; one of the other appeals to Gardiner's new funds is that he and Walker come from Wasatch, which has a stellar reputation for closing funds to ensure they don't get so big that they stumble.

It all sounds great, until you factor in that Gardiner made his reputation in small-cap stocks, a sector of the market that has been hurt more than the most.

"It's a strange position to be in, where you can see a great manager opening a new fund, but you can't necessarily justify buying it because the near future in small caps is not very appealing," said Jerry Tweddell of Tweddell Goldberg Investment Management in Sonora, Calif., who specializes in investing in new-issue mutual funds. "Most people want to be with the right manager, but they also want to be in the right sector, and in this case you have to wonder which is more important."

In the release announcing the new funds, Gardiner says that, "The best long-term investment opportunities can be uncovered by investors who are fully canvassing the world to find and consider each company within its global context." In promoting the fund privately, Gardiner has told financial advisers and money managers that, "(The) international small and micro-cap arena feels like the U.S. did to me in 1995 when I launched Wasatch's micro-cap fund."

That's precisely what wishful investors want to hear. They want to think that in going for Grandeur Peaks, they get the next Wasatch Micro-Cap.

It's a compelling story and opportunity, but you have to be that rare fund investor who still believes in stars, and you need to ignore a landscape littered with fallen angels. That makes the call on Grandeur Peaks much tougher.

"He's a great manager, no doubt," Tweddell said, "but he's facing a pretty strong headwind right now, and even the great managers have a tough time when the market is stacked against them."

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at P.O. Box 70, Cohasset, MA 02025-0070.

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