Scrutinize niche funds

Trendy is not the word that comes to mind when I think of saving. But a new mutual fund company hopes to change that.

Thrasher Capital Management (www.beathrasher.com), started by childhood friends James Perkins Jr., 29, and Khalid Jones, 28, launched the GendeX Mutual Fund last month. The fund has its own MySpace page (myspace.com/thrasherfunds) featuring a group of Gen X and Y hipsters — the “Next Investors” that the fund hopes to attract — and its own educational YouTube videos. Perkins, who has worked on Wall Street since graduating from college, was sick of seeing the investment world ignore his generation and sick of watching his peers blowing their money instead of saving it.

So he started the New York-based GendeX fund, featuring a low minimum and materials written in plain English. In an interview, Perkins explained that the fund bases stock picks in part on his theory that the spending and consumption habits of the younger generations and the boomer generation are increasingly similar. Middle-aged dads and their kids carry iPods. Soccer moms and rappers wear Polo Ralph Lauren.

“You love your brands, I know,” writes Khalid Jones on the firm’s Web site. “I just want to help them love you back.”

With a vast universe of investments to choose from, mutual funds need to pick an investment strategy and label themselves in a way that potential customers can understand. An attention-grabbing gimmick can’t hurt, either.

Many select broad guidelines — investing in companies of a certain size or from a certain country, or a combination of the above.

A growing number of funds exist for those who care about the environment or societal concerns.

There are funds based on religious beliefs such as the Catholic values-based Ave Maria funds and the Amana Mutual funds based on Islamic principles.

Yet other funds, such as the GendeX fund, carve out a slice of the investment pie by catering to an investor of a particular age. The Monetta Young Investor Fund and others like it buy stocks such as Mattel and McDonald’s — names that school-aged kids would know.

For people willing to bet on gambling, tobacco, drinking and other “sin” stocks, there’s the Vice Fund. Race-car fanatics might try the StockCar Stocks index. Staunch Democrats can elect to invest in the Blue Fund.

It’s easy to understand the appeal of a fund that caters to a specific customer group and its interests or values. To me it seems like an extension of the “buy-what-you-know concept” made famous by acclaimed fund manager Peter Lynch.

Focusing on a niche that you know and care about is not a bad starting place. “If [a niche fund] gains the interest of investors and it makes a passionate investor for the long haul, I think it’s a good thing,” said Lipper senior research analyst Tom Roseen.

But it’s not that simple. What you like doesn’t necessarily translate into a good investment. Dig a little deeper.

“Look at [narrowly defined funds] using the same standards as any fund,” said Morningstar mutual fund analyst David Kathman. Consider:

UPrice. It can be high for niche funds, since a smaller fund will generally cost more to run. GendeX’s net expenses are 1.5 percent, an amount that strikes Kathman as “kind of high.”

UTurnover. Frequent stock-selling in a fund will increase trading costs and eat away at your return.

UHistory. A new fund obviously won’t have a lot of history, but the fund manager making the investment decisions should. His or her skill is what matters. For example, Perkins runs a hedge fund using a similar investment philosophy, but he hasn’t managed a fund before.

If a niche investment fund awakens your interest in the stock market, why not sample it with a small slice of your savings?

But Kathman cautions that funds with a very narrow focus should be “the spice” in your portfolio, not the main dish.

X Kara McGuire writes about personal finance. Write to her at kara@startribune.com or at the Star Tribune, 425 Portland Ave., Minneapolis, MN 55488.