Crash the party at 4 top institutional funds

By Morningstar

Institutional funds have lots of appeal. They typically have good managers running disciplined strategies. They typically attract sober investors who won't jump in and out all the time, running up commissions on the backs of long-term investors.

Most importantly, they usually charge much less than most retail funds. Institutional funds don't have 12b-1 fees, and they also save money by not servicing many small, high-cost accounts. Of course, that does you no good if you can't get into them, but some are actually pretty easy for individual investors to access.

The word 'institutional' can be applied however a fund company chooses to, so you'll see a wide variety of investment minimums and barriers to entry. Here are a few of my favorite institutional funds and how you can get in.

Harbor Bond Institutional

Harbor Bond Institutional (HABDX) is easy. Call up Harbor or go to the firm's site and send in a check for $1,000 or more. That's right -- this fund's minimum investment is just $1,000, so don't let the name throw you. It's not available in fund supermarkets without paying an added fee, but that's not really a big hurdle, is it?

The fund is run by Bill Gross and his crew at PIMCO. They are as good as any bond managers around, and when you can hire them with just $1,000 up front and pay just 0.57% a year, you've got a good deal.

LKCM Small Cap Equity Institutional

LKCM Small Cap Equity Institutional (LKSCX) is a small-cap fund with good management, low costs and modest assets, and it isn't closed to new investors. The number of funds you can say that about doesn't even reach the double digits. The only barrier to entry is the $10,000 minimum, and you hardly have to be a Rockefeller to scrape together that much.

Managers Luther King and Steve Purvis are straightforward fundamental investors. They seek out small, niche companies with good growth potential and high returns on equity -- but also strong balance sheets and reasonable valuations. The fund's trailing five-year returns are an annualized 12.5%, a performance that lands in the small-blend category's top quintile.

PIMCO StocksPlus Institutional

PIMCO StocksPlus Institutional (PSTKX) is more of a true institutional fund. But there is a way in for individual investors. If you invest through a fund supermarket, you can buy this fund by paying a transaction fee typically around $35. Although this fund is available in retail share classes, its institutional share class charges 0.6% versus 1% for the no-load D shares. That $35 fee may well be less than the expense gap, and that's crucial for a fund that aims to beat the S&P 500 ($INX) through small bond bets.

The basic strategy employed at this fund is to buy S&P 500 futures, which require just a modest cash commitment, and invest the rest of its cash in an ultra-short bond portfolio. If the ultra-short portfolio outpaces the built-in cost of the futures, the fund can outperform the S&P 500 before expenses. Over the past 10 years, the institutional shares have even managed to beat the S&P 500 by 20 basis points annualized. However, the retail shares have lagged since inception because of that cost hurdle.

I like the contrarian case for this fund. First, blue chips have lagged small caps for a long time now. Second, the cost of the futures has been tough to overcome as the Fed keeps hiking rates. When those trends reverse, this fund will look pretty good. One last note: The strategy is weak on tax efficiency, so it's only worth holding in tax-advantaged accounts.

Harbor Capital Appreciation Institutional

Speaking of contrarian bets, how about a large-cap growth fund? Harbor Capital Appreciation Institutional (HACAX) stock funds aren't as easy to access as their bond funds. Harbor created a retail share class for fund supermarkets that includes the fee supermarkets charge them. However, you can get the cheaper institutional share class for an investment of $50,000.

What you get in this fund is the outstanding management group of Sig Segalas and his team at Jennison Associates. They run a disciplined research-intensive growth strategy. Our analysts recently visited Jennison and came away pleased with the current state of affairs. I own this fund and expect big things in coming years.

Institutional-type fees without the label

Since the whole point here is to find good low-cost funds, it's worth noting the value proposition offered by Vanguard and Fidelity. Vanguard's Admiral share classes aren't quite as cheap as their institutional funds, but they are cheaper than most institutional funds offered by other companies. To get in, you need to invest $100,000 or have $50,000 invested in a Vanguard account at least 10 years old. So, if you're close to $100,000 in a fund at Vanguard, see if you can up your investment a little and switch to the Admiral shares.

At Fidelity, Spartan share classes are a good deal typically available for $10,000. Fidelity slashed expenses at its index funds to just 0.1% -- a deal that's tough to beat. Not impossible, though, in the case of E*TRADE S&P 500 Index (ETSPX) and E*TRADE International Index (ETINX). At those funds, the minimum is $5,000 and the expense ratio is 0.09%.

By Russel Kinnel, Morningstar