Fund name: Capital Advisors Growth Fund (CIAOX)

Objective: The fund seeks long-term capital growth by investing, primarily, in domestic stocks. They target companies "with prospects for above-average growth over an extended period of time." That judgment is informed by research to substantiate the presence of an economic "moat" and internal investments designed to widen the moat. The fund is non-diversified and the portfolio contains 28 stocks. About 10% of the portfolio is in international stocks.

Adviser: Capital Advisors Group. Richard Minshall founded Capital Advisors in Tulsa in 1978. The company manages assets for high net worth individuals, and small to mid-sized institutional investors.

Manager: Keith Goddard and Channing Smith. Mr. Goddard is the President, CEO, CIO and Director of Research for the adviser. He has been managing money for Capital Advisors Group since 1991 and became a manager on this fund in 2004. Mr. Goddard also oversees 173 other accounts with net assets of $463 million (as of 12/07). Mr. Smith is a Vice President and analyst for them. He joined the firm in 2004, straight out of his MBA program and joined the fund in 2007.

Management’s Stake in the Fund: Mr. Goddard has between $100,000 and $500,000 in the fund while Mr. Smith has under $50,000 invested. There was, effectively, no trustee ownership as of 12/07.

Opening date: December 30, 1999.

Minimum investment: $5000, reduced to $1000 for an account with an automatic investment plan or $500 for a retirement account.

Expense ratio: 1.50% (after waivers) on assets of $12 million. Morningstar reports a 2.0% redemption fee on shares held less than one week.

Comments: CIAOX came to my attention for two reasons, one good and one bad. The good reason: I like keeping money at least as much as I like making money. I know that the stock market is risky and that good managers take calculated risks in their attempt to outperform the market. I’m willing to accept that, as long as the risks are rationally calculated. Among the best folks at that art work for T. Rowe Price, the champion singles-hitters of the investing world. Price funds seem configured to avoid striking out and to make their money by a pretty consistent series of small gains.

In pursuit of comparable funds, I ran a simple screen: I wanted no-load, retail funds that never finished at the bottom of the heap. In practice, that meant that a fund had to avoid the bottom third of its peer group every year this century. There are around 100 such funds (in a universe of 10,000 funds), but the vast majority are muni-bond funds. Only about 25 stock funds passed the screen, with a sizable minority being T. Rowe Price funds. Among the others were a handful of index funds, several funds that I’ve previously profiled (such as Wasatch-1^st Source Income Equity and Manning & Napier Tax-Managed), and Capital Advisors Growth.

CIAOX has finished in the top 2-4% of its peer group for every trailing period from 3-months to 5-years. Over the past five years, it has an annualized loss of about 0.5%/year, which crushes its large growth peer growth by nearly seven points. How? The fund leads the pack about one year in three, about matches the pack one year in three, and trails the pack about one year in three. The key is that the fund’s good years tend to be very good (top 10% finishes) while its bad years tend to be not particularly bad (in its worst years it trails just 60% of its peers). Morningstar rates the fund as having consistently "high" returns with "below-average" risk. It’s earned the designation "Lipper Leader" for total return, consistency of return and tax efficiency.

While this is ostensibly a growth stock fund, the managers sound a whole lot like Jeremy Grantham of Grantham, Mayo, van Otterloo (GMO). GMO, for those who don’t know, is a singularly excellent institutional money manager that caters to spectacularly rich clients (some of their funds have $10 million minimum initial purchase requirements). Mr. Grantham, caricatured as a "perma-bear," is an awfully smart, thoughtful commentary on where the market is, how it got here and where it might go. Well before the blow-up in late 2007 and 2008, he urged investors to adopt the greatest degree of conservatism their portfolios would allow. He’s now arguing that we’re nearing a bottom, that the market might well make another dramatic downward move because markets tend to overshoot their "fair" valuations, and that folks should begin moving back into high quality U.S. stocks over the next six months.

In their recently-issued "Overview: Fourth Quarter 2008," the Capital Advisors make virtually identical arguments and reach the conclusion that the current market demands "the utmost respect from investors" and that it "warrants extra caution." They repeat their appeal to caution about six more times before concluding that "opportunities should continue to emerge" and that they intend to pursue "an increased commitment to ‘blue chip’ growth stocks," which they identify as offering the market’s best total return prospects.

As long as you’re cautious.

Despite its excellence and prudence, it – like Manning & Napier, has a minute asset base. Why so? In CIAOX’s case, the fund remains true to its origins. A brief conversation with one of the folks at the advisor confirmed that the fund was launched as a service offering; it was a way for friends, employees or relatives of Capital Advisor’s affluent investors to access Capital’s expertise even though they couldn’t meet the separate account minimum. As a result, the firm has no marketing for the fund – it doesn’t get discussed on their website except in the form of a link to the prospectus. There’s no page devoted to the fund and no way to access applications, annual reports or the SAI. Perhaps as a result, assets (typically right around $15 million) and expenses before waivers (typically 1.88%) have been extremely stable over the past five years. Portfolio turnover, likewise, stays right around 75%.

The good reason was that these guys are very solid, very quiet sluggers. The bad reason, I blush to admit, is that the fund’s ticker symbol (CIAO – Italian, and pronounced "chow") is the name of our oldest cat. Living, as we do, in the Midwest, our vet is chronically incapable of pronouncing the animal’s name and refers to her as "cee-ow".

Bottom Line: Folks need to consider seriously what strategy for portfolio recovery they’ll pursue. If you’ve lost a third or more of your investment, it’s entirely understandable that you’ve lost your appetite for risk. That said, recoiling from stocks and seeking the "safety" of CDs and Treasuries is, for long-term investors and folks who actually need to rebuild, folly. The rates of return there offer no prospect for recovery, ever.

The alternative is to seek out folks who are intensely risk-aware but also committed to balancing that risk with the prospect of returns. And it makes sense, too, to seek out folks who have actually managed to accomplish those goals rather than just talking about them as the marketing ploy du jour. Several small funds, Capital Advisors Growth and Manning & Napier Tax-Managed for excellent examples, have managed to accomplish just that. Investors looking to creep back into the market might reasonably seek the services of such managers.