When it comes to superstar mutual funds, few shun the limelight the way Winnetka, Ill.'s Bruce Fund does. Father-and-son comanagers, Robert and Jeffrey Bruce, rarely speak to the press, refuse to be photographed and limit shareholder communication to the bare minimum.

By the numbers, however, the Bruce Fund (BRUFX) may very well be the best-performing diversified no-load mutual fund in the business today. Morningstar ranks it first in performance for 1-, 3-, 10- and 15-year periods among funds in its category. Last year the fund had a total return of 24% versus 15% for the S&P 500. Over the last decade it has had an astounding 18% average annual return. That's better than the performances of Ken Heebner's CGM Focus Fund and Bruce Berkowitz's Fairholme Fund--by a wide margin.

What's the Bruce Fund's secret? Penny-pinching on expenses combined with an eclectic go-anywhere approach to investing that mixes special-situation microcap stocks with convertible securities, Treasurys and cash. This flexibility has paid off in dismal markets like 2008's. That year the fund lost 27% versus a 38.5% drop for the S&P 500 and a 48% decline for CGM Focus. Indeed, Bruce is a six-year member of the Forbes Mutual Fund Honor Roll with an A grade in up markets and an A+ in down markets.

Despite its record, the fund's modest $299 million in assets under management and its 0.88% expense ratio speak volumes about its managers' attitude toward fund marketing.

"I don't think any Morningstar analyst has been able to talk to them," says Morningstar's Janet Yang. "They have basically told us that they're happy to talk to any of their investors if they call, but they're really not interested in talking to analysts or the media. They want their returns to speak for themselves."

After repeated telephone calls from FORBES Jeffrey, 51, finally picked up the phone, saying, "It's just two of us here, and we're not looking for any additional exposure. I don't even care if you write anything at all. We'd rather just increase the assets that we have and expand that way."

The Bruce Fund inherited this head-down investment philosophy from the once highly successful Mathers Fund. Thomas Mathers' fund was one of the best-performing funds in the 1960s and early 1970s. In fact in 1972 it was the highest-ranked no-load mutual fund in FORBES' annual mutual fund survey. But few ever knew that Robert Bruce, now 79, was one of the unsung heroes that made the Mathers Fund great.

In a 1972 FORBES story entitled "Humble Success" Thomas Mathers described his firm's philosophy this way: "We've never had any ambition to a big position in the industry. We stay away from the peripheral things." Sound familiar?

In 1973 Robert Bruce left the Mathers Fund (which was later purchased by GAMCO in 1999) to manage his own money, and in 1983, a year after his son Jeffrey graduated from the University of Colorado, he bought a mutual fund charter and renamed it the Bruce Fund. Today the father-and-son duo have a single-minded approach to investing: capital appreciation by any means possible.

"We get mislabeled as a hybrid fund because occasionally we find opportunities in bonds--both convertible bonds and sometimes depressed bonds in distressed companies," says Robert Bruce.

Adds Jeffrey, "We don't screen large populations of stocks looking for low P/Es or price-to-book or returns on equity. It's really stories that we listen to." What Jeffrey is referring to is a network of brokers and research boutiques the firm taps for in-depth knowledge of special situations and distressed companies.

One such story stock the Bruces have made a killing on is Amerco ( AOPRA - news - people ), the long-troubled parent company of U-Haul. In 2003 the company was reeling from a family feud, lawsuits and accounting irregularities. But the Bruces were impressed with Amerco's fundamental business of renting moving trailers. They also liked that management held nearly three-quarters of its own stock and had a deeply undervalued real estate portfolio.

Accounting woes and litigation forced the company to file for Chapter 11 bankruptcy in June 2003. However, management's intention was to leave the common equity intact, paying off bondholders and restructuring the debt. This turmoil at U-Haul sent most institutional investors running for the exits.

"We continued to buy right through the bankruptcy," says Jeffrey. "We started buying the common stock in the $20s. It went all the way down to $2, and we stuck with it." Amerco emerged from bankruptcy like a rocket. By February 2005 its stock was $48. Today it sells for $86, and the Bruce Fund still owns it.

Many of the companies that the father-and-son team favors are small caps. In fact, the average market capitalization of the fund's 32 stock holdings is $1.1 billion.

"Smaller securities are a little riskier. We think convertible bonds are a nice way to play these," says Jeffrey. Convertible bonds and preferreds generate yield for owners but also offer the potential for capital gains if holders convert to stock.

As of March 2011 the fund held 23 convertible bonds and preferreds, including biotech companies like Human Genome Sciences ( HGSI - news - people ), deCODE Genetics, Cell Genesys ( CEGE - news - people ) and Cell Therapeutics ( CTIC - news - people ).

"A lot of biotechs have hiccups along the way in their drug discovery or some adverse rulings with the FDA," says Jeffrey." When they get an adverse ruling or a study comes back that doesn't support their hopes, you get a big oversized negative reaction. That's when we start to look at them."

The Bruces aren't afraid to buy defaulted bonds or so-called busted convertibles. These troubled issues trade like debt because there is little prospect that the stock conversion will be exercised.

InterMune ( ITMN - news - people ), a Brisbane, Calif. biotech focused on hepatitis C and pulmonary fibrosis, is one example. Its convertibles due in 2015 provide a 5% yield but don't offer much value as a potential stock investment.

"We like buying them near the edge of the cliff. If they snap back you make some money, but some of them do go right over the cliff," says Jeffrey.

Despite the Bruce Fund's fearless approach its current mix of investments is decidely bearish. The normally small-cap-oriented fund holds significant positions in big cap dividend stocks like Pfizer ( PFE - news - people ), Merck ( MRK - news - people ) and Abbott Labs. ( ABT - news - people ) It also has 43% of its assets in bonds, including 11% in zero coupon Treasury STRIPS.

"We think there's a possibility of a little bit of commodity disinflation, or moderation, and a slower economy than people had hoped. This would bring back U.S. Treasurys as a safe haven," says Bruce.

The Bruce Fund also likes cash, which represents 9% of the fund today. Says Jeffrey, "We're willing to accept a nonreturning asset. We like to keep some powder dry in case a better opportunity arises."

#### Capital Appreciation: By Any Means Possible

Bruce's managers look for "stories." Below are their top ten holdings.
Security | Business | Portfolio Weight
U.S. Treasury STRIPS* | Bonds mature in 2028 and 2029 | 9.30%
America Service Group | health care services to Prisons | 5.33
Amerco | Owns U-Haul, real estate | 4.15
C&D Technologies | power storage and conversion | 4.05
AirBoss of America | mixed rubber products | 4.03
Omega Protein | fish oil and animal feed | 3.01
Titan International | Manufactures tires | 2.78
XM Satellite rADio* | Satellite Radio provider | 2.57
ATP Oil & Gas** | offshore natural gas and oil | 2.40
Endeavor International*** | Oil and gas producer | 2.33
*bonds. **convertible preferred stock. ***convertible bond. Source: SEC filing (3/31/11).