A little more than 12 months ago, I wrote an article about the Goldfarb 10, a group of 10 value funds recommended by Sequoia Fund President Bob Goldfarb. Among the stellar list of open-ended funds is a closed-ended fund that trades on the New York Stock Exchange. Part of a small but well respected group of funds managed by Los Angeles-based First Pacific Advisers, LLC, Source Capital (NYSE:SOR) is an excellent small cap for any long-term investment portfolio.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

Small Number of Stocks
It's bothersome to see mutual funds that invest in everything but the kitchen sink. Money managers do this in order to reduce company risk but all they really do is put a governor on returns. I much prefer to see a focused group of stocks that represent a manager's best ideas. Source Capital has just 41 holdings with assets totaling $594 million. The top 10 account for 46.5% of the portfolio. The higher this number is, the better. Its largest holding is automotive parts retailer O'Reilly Automotive (Nasdaq:ORLY) followed by CarMax (NYSE:KMX), Wabco Holdings (NYSE:WBC) and Signet Jewelers (NYSE:SIG).

Low Turnover
The fund's turnover is 9% annually. This means managers Eric Ende and Steven Geist trade the entire portfolio once every 11 years. Fortunately for shareholders, both have been with FPA for a long time and likely aren't headed anywhere so they'll be around in 2022 to make the necessary changes. All kidding aside, they have an incredible patience that usually pays off handsomely. Case in point is Wabco Holdings, a manufacturer of anti-lock brakes for commercial vehicles. The fund first bought shares in the company in the second quarter of 2008, picking up 60,000 at an average price of approximately $45 a share. Less than a year later, they were trading below $10. The story doesn't end there. In late January 2009, I wrote that Wabco's downside at $15 was limited and the upside tremendous. Ende and Geist must have agreed because not only did they keep the 60,000 shares, but they also bought another 400,000 in the second half of 2008 at prices between $15 and $35. Today, Wabco sits around $58. They could have sold but they hung in there and shareholders won.

Reasonable Fees
One of the fundamentals for investment success, whether using individual stocks, mutual funds or ETFs, is to reduce fees and taxes. Source Capital's annual expense ratio is 1.04%. When compared with four of the Goldfarb 10, it's more than reasonable. For instance, Bill Miller's Legg Mason Value Trust (LMVTX) has an annual expense ratio of 1.77%, despite mediocre performance in recent years. The best in terms of fees is Source's sister fund, FPA Capital (FPPTX), which has an annual expense ratio of 0.88. If you're a real stickler for low fees, you might want to check it out.

Good Performance
Just because a fund has low fees and low turnover does not guarantee good returns, but it definitely helps. Source Capital beats both the S&P 500 as well as the Russell 2500, in both 10-year and 15-year annualized returns, which is exactly what you want if you're investing for the long-term. The best part here is that we're talking about after-tax returns. Because it trades so infrequently, fees and taxes aren't a big drag on the total return of the fund. Slow and steady wins the race.

Bottom Line
If you want some small-cap exposure in your portfolio, investing in Source Capital is a good way to do so, while at the same time securing competent investment management. It's a win/win situation. (If you don't realize how "big" small-cap stocks can be, you'll miss some good investment opportunities. Check out What Is A Small Cap Stock?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  7. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  8. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  9. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  10. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center