Investing: Some new funds worth considering

As long as you're throwing out the bums in Congress — you are, right? — why not throw out some of your old, poorly performing mutual funds? Once you've done that, you can look at new funds, some of which are extremely promising.

Most mutual funds preach the virtues of long-term investing, despite the fact that most actively managed funds trade stocks at a frenetic rate. The average large-company blend fund, for example, replaces about 64% of its portfolio each year, according to Morningstar.

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But there's no particular need to hang on to a badly performing actively managed fund. Typically, a fund company judges a manager on his three-year record. There's no reason you shouldn't, either.

At least by the three-year test, there are plenty of large, poorly performing funds. The three funds with assets of more than $1 billion that have lagged their peers the past three years:

• American Funds Investment Company of America, $49 billion in assets, lagging 66% of its peers.

• Davis NY Venture, $11 billion in assets, lagging 81% of its peers.

• Hartford Capital Appreciation, $5.6 billion in assets, lagging 74% of its peers.

Other big three-year laggards include Fidelity Dividend Growth, LongLeaf Partners and Selected American Shares — run by the same team that runs Davis NY Venture, not coincidentally.

None of these funds got big by being dummies: All have had substantial periods of outperformance. But waiting for them to return to glory could be a long wait. In some cases, their own size may be an impediment; it can take longer to unwind big positions that managers no longer like, and longer to accumulate significant stakes in funds that managers do like.

In many cases, you can simply find a fund with a better record. For example, most funds that follow the Standard & Poor's 500 stock index have clobbered the average large-company blend fund, according to Morningstar. These funds often ! have much lower expenses than the average actively managed fund, which is an enormous edge. The bulk of your portfolio should be in low-cost funds that track a broad-based index, such as the S&P 500 or the Russell 3000, which tracks nearly the entire universe of U.S. stocks, large and small.

The fund industry is prone to rolling out specialized funds in red-hot areas, and you should avoid them. They usually lead to woe. If you're looking for a new, actively managed fund with the potential to outperform its peers, try to confine yourself to new funds run by managers with proven track records. One recent example: Akre Focus Fund (ticker: AKREX), run by Charles Akre, former manager of the top-performing FBR Focus Fund. Since the fund started in August 2009, it has gained an average 18.28% a year, and an average 21.73% a year the past three years, beating 97% of its peers.

Akre Focus hasn't gone unnoticed: It has about $1.7 billion in assets — not unmanageable, but not tiny, either. A few new funds run by seasoned managers:

• RiverNorth/Oaktree High Income (RNOTX), geared for income investors. The fund puts about 25% of its assets in closed-end funds, which are funds that trade on the stock exchange, often for substantially less than the value of their holdings. The rest is invested in high-yield and bank-loan bonds, says Jeffrey DeMaso, director of research at Adviser Investments in Newton, Mass. The RiverNorth section of the fund is run by Patrick Galley and Stephen O'Neill, both formerly of Bank of America; Sheldon Stone, co-manager of Oaktree's section, worked at TCW's high-yield bond department for a decade. "They cut their teeth being value investors in high-yield, convertible, and distressed bonds, DeMaso says.

• Seafarer Overseas Growth & Income (SFGIX). This emerging markets fund is managed by Andrew Foster, who comes from the hugely successful Matthews Asian Growth & Income fund. David Snowball, proprietor of The Mutual Fund Observer (www.mutualfund! observer.! com), isn't easily impressed, but he's very impressed with Seafarer, an emerging markets fund. "The fund can invest in any area of the world, and it can invest in companies in developed markets that benefit from emerging markets," Snowball says. If you're looking for an area where you can find real value, emerging markets is probably it. Even though they have rebounded, many emerging markets still sell at historically low levels, relative to earnings.

• Oakseed Opportunity Fund (SEEDX), a large-company growth fund started Dec. 31 by Greg Jackson, formerly co-manager of Oakmark Global Fund and John Park, formerly manager of Columbia Acorn Select. Both have been private-equity investors, and both managers have substantial investments in the fund. "They're investing their families' fortunes and their personal fortunes in the fund," Snowball says.

• Beck, Mack & Oliver Partners (BMPEX), an all-cap fund with a large-cap tilt. Beck, Mack & Oliver was formed in the depths of the Depression, and their main aim has been keeping wealthy people wealthy. They look to buy shares of quality companies at a discount, even if they have to wait years to find the right buying opportunity. Manager Zachary Wydra comes from Water Street Capital and Graham Partners, a private-equity firm.

• Riverpark Strategic Income, run by David Sherman of Cohanzick Management. This is an income fund for people who are worried about the bond market, as Snowball is. "I don't imagine that putting money in a straight-up bond fund will do you any good between now and when you die," Snowball says. The fund invests in a variety of short and intermediate-term securities and aims for reasonable returns with a minimum of volatility.

Jumping into any new fund entails risk, and selling old funds — even stinky ones — can trigger capital gains taxes. Study any new fund carefully. But if you're looking to make a change in your actively managed funds, these all deserve a look.