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Attractive Blend Funds

by Thurman Smith

In the below discussion GROWTH POTENTIAL is a measure of relative up-market performance, RISK EXPOSURE is a measure of relative down-market performance, and ISQ is a measure of reward to risk. The norm for all is 10. Data is as of January 14th.

We have all learned that chasing earnings growth can lead to big disappointments when an over-bought market decides to take a break (2000). On the other, hand pure value funds can buy issues that stay undervalued all too long, or underperform market benchmarks for sustained periods (1998-1999).

The growth-at-a-reasonable price ("blend") manager will pay more than a value manager, but only in proportion to the potential for growth in revenues or earnings. Below are six efficient blend-style funds that moved out smartly in the last three months, a period in which the broad market fell slightly. 

At mid-cap Meridian Value (MVALX) lead manager Kevin O'Boyle trimmed technology and telecommunication issues early last year and  put those assets into energy, health care, and industrial services. He  actively seeks out quality companies that suffer disappointing operating  results because they stumbled for a couple of quarters, but have catalysts in place to get back on track. This leads him to favor industries that are currently having problems. That most selections have been good ones is seen in both high return and low risk exposure. The fund holds about forty stocks and positions are evenly weighted. Meridian Value is reasonably tax-efficient and available at Schwab.

With assets of only $11 million Strong Cap Disciplined (SMCDX) has a low profile considering its good results. Manager Dean Dumonthier puts buy candidates through a strict intrinsic value filter. The result is a low-P/E, low-risk portfolio where the holdings average higher than its category in 3-year projected earnings growth. Services is by far the largest sector with financials and technology tied for second place, but all sectors save consumer durables are represented. About six percent is invested outside the US. Its low tax impact makes it suitable for all accounts.

Westport Small Cap (WPSRX) has performed almost three times as well as its peers over its two-and-a-half years. Its charter is very flexible and does allow for a few larger-cap holdings . While a third of assets are in firms larger than small-cap its median market cap of $1.2 billion is still under the small-cap ceiling. Its tech weighting is average, but services are twice their weighting in the S&P 500. There are no consumer-oriented issues. Its reasonable asset base of $150 million makes it likely that experienced managers Andy Kenneth and Ed Nicklin can emulate their good long-term record in other vehicles. Small Cap has occasional periods of underperformance, but is very competitive over one-year or longer periods. Taxable accounts will appreciate its tax-efficiency. 

Over its eleven years highly diversified Neuberger Genesis (NBGNX) has tracked its small blend peer group average closely. It failed to beat its competitors in 1998 and 1999, but had a good bounce in 2000 from some of its slow-growth holdings like Newport News Shipbuilding and Cordant Technologies, the aerospace supplier bought out by Alcoa at substantial premium. Buyouts are pleasant surprises that can happen to funds such as Genesis that don't pay too much for their stocks to begin with. The fund got a co-manager, Bob D'Alelio, in 1997 to work with Judy Vale. This offering is tax-efficient, but its $725 million assets are more than ideal for a small-cap offering. Genesis is still not a buy, but with more time in the top percentiles of its cap-style group, it might become an attractive addition for conservative accounts.

With a median market cap now at $1.6 billion Buffalo Small Cap (BUFSX) is now bordering on mid-cap territory. Over its thirty-three months it provided an annualized total return of 22%, while its small-blend peers averaged only 8%. Its risk exposure (9.0) is nine-tenths that of the market, but it sports a growth potential (12.3) of almost a fourth more than the market, which results in a comfortable investment skill quotient (ISQ) of 13.7. The Kansas-based team looks for firms with sustainable long-term growth and consistent cash flow. This means firms with a hard-to-duplicate business franchise. The modest asset base of $50 million and good tax-efficiency suggest a useful long-term holding in the small-mid area for most market-risk accounts.

Bogle Small Cap Growth (BOGLX) is a market-risk vehicle that uses a stock selection system based on price inefficiencies following revisions in earnings estimates by "the street." This approach is similar to what manager John Bogle, Jr. used at Numeric Investors, but with more fundamental analysis. The portfolio is very diversified and no issue is overweighted. Tax-efficient so far and very small in assets, it might be useful for a portfolio that needed some zip without high risk. Bogle Small Cap is available at Waterhouse.

Copyright © 2001 Thurman Smith. All rights reserved. Thurman Smith is an asset manager in Boston specializing in growth funds and editor of Equity Fund Outlook, a monthly subscription newsletter that rates over 250 growth funds on the basis of management skill. Equity Fund Outlook is highly rated by the Hulbert Financial Digest. For information about Equity Fund Outlook and a low-cost trial subscription visit www.efoutlook.com, call 800-982-0055, or send a post card to E.F.O., P.O. Box 76-B, Boston, MA 02117.

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