Fund name: FMI Large Cap (FMIHX)

Objective: The fund seeks long-term growth by investing in undervalued large companies with sustainable economic advantages and strong returns on investing capital (ROIC). The fund holds about 25 stocks.

Adviser: Fiduciary Management, Inc. of Milwaukee. FMI was founded in 1980 and manages approximately $3 billion in several small mutual funds and a variety of alternate investments (e.g., endowments).

Manager: A five-person management team, directed by CEO Ted Kellner and Patrick English. Mr. Kellner has been with the firm since 1980, Mr. English since 1986. Kellner and English also co-manage FMI Common Stock, a solid, risk-conscious small- to mid-value fund which is closed to new investors.

Inception: December 31, 2001.

Minimum investment: $1,000

Expense ratio: 1.00% on an asset base of about $140 million.

Comments: FMI Large Cap strikes me as a first-rate offering. It has a compact portfolio, some exposure to international stocks (around 15% of the current portfolio), reasonable expenses, and an experienced management team. The fund is approaching its fifth anniversary, which may well bring it to the attention of a larger number of investors as it pops onto more advisers� radar screens.

The appeal of this fund is pretty straightforward:

• The management is awfully sensible: they are clearly risk-conscious in their approach to equities. They look for a strong business model and stock that is appreciably undervalued. They tend to invest for reasonably long periods, which is reflected in a turnover rate around 40%.

And they communicate effectively with their shareholders. While it may seem like a trivial consideration, there�s a lot to be said for working with managers who treat their shareholders with respect. That respect is reflected, in part, in the firm�s decision to close FMI Common but also in the quality of their communication with shareholders. Their most recent shareholder letter is about five pages long, clear, conversational and filled with substantial information. They reproduce, for example, three historic valuation charts from the Leuthold Group in support of the argument that the market is quite richly valued even after the May-June slump. The information is reasonably complex, but they don�t shy away from talking it through and they don�t resort to the fund world�s common practice of viewing all communication as simple marketing message delivered to half-wits. They also update the information on their website (holdings, commentaries, performance comparisons) quite frequently.

I like their approach a lot.

• This fund is an extension of the successful Common Stock fund. FMI is joining with a number of other proven small- to mid-cap investors in offering a fund which includes many alumni equities. That is, many of the stocks in Large Cap started in the small cap fund but simply outgrew its mandate. As a result, these are companies that � in many cases - they�ve been following for years. This same strategy has worked for Baron and Artisan, though Ariel seems to be struggling a bit with it.



• Finally, they do good work. It�s worth measuring �good work� as a factor of both returns and of the risk that generated those returns. In absolute return terms, FMI Large Cap has been a consistent star. It has returned about 15% annually over the past three years. And it has outperformed both its peer group and the S&P 500 for every calendar year and every trailing period that Morningstar tracks. It has earned those returns without taking large risks. Morningstar praises its below-average volatility. And its M-squared, the rating of risk-adjusted return relative to its peer group, is 15.4. That falls into the group�s top quintile and places it among the ten best no-load large caps. The large cap funds with similar M-squared values gives you a sense of the select company that FMI Large Cap keeps: Dodge & Cox Stock, Fairholme, Fido Large Cap Value, Fido Leveraged Company Stock, ICAP Select, Philadelphia (there�s a neat story to be told another day about this fund, which began life in 1923), and T. Rowe Price Capital Appreciation.

Bottom line: This is pretty much the poster child for a star in the shadow: high performance, moderate risk, low visibility. It would be prudent to give it a look.

Company link: FMI Funds