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Look Both Ways

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 May 12, 2000.

If a correction is effectively over it pays to look for funds that are moving up well off the bottom, but which are efficient reward-risk-wise should there be more trouble. Here are several funds that have exceeded the Wilshire since the April low and have an attractive rating. All stock selection styles are represented.

Concentrated Turner Top Twenty (TTOPX) has a charter allowing any size holding, but the median market cap, $65 billion, is now well into large-cap territory. Holdings are meant to represent the best picks of all their managers. This is the one Turner fund that does not try for sector neutrality: the top picks of its managers happened to fall overwhelmingly in the tech sector, 95% to be exact. Of course, unlike a tech fund, sector weightings can change. The firm has been making noises about closing when assets reach $150 million, They are now at $136 million.

Market-risk PBHG Small Cap Value (PBSVX) has been run by Jerome Heppelman since last June, since when he has delivered a total return of 36%, four times as good as that of the Russell 2000 index. This very diversified fund has positions in almost every sector but utilities, and would be useful in a portfolio needing to reduce its technology weighting and risk. It is a true value vehicle: the average P/E is only 60% of the broad market. With net assets totaling $89 million it could get too large soon if it catches on. 

For an aggressive fund over-weighted in technology Oak Associates White Oak (WOGSX) has been amazingly resilient. This low-turnover concentrated jumbo-cap fund is also very tax-efficient. The portfolio is over half in technology, with the rest in only two other sectors. The tech choice is a top-down call, particularly for telecommunications, storage and networking. Other favored sectors are financials (Oelschlager likes Schwab and Morgan Stanley / Dean Witter) and health (Merck, Eli Lilly and Medtronic). White Oak is a consistent winner, with an up year every year but its first, 1993. White Oak is not strongly correlated with either market. 

FMI Focus (FMIOX) is the most attractive small-cap for market-risk  investors. It consistently beats both its peer benchmarks and the market as a whole. Its eighty-eight holdings are well spread out among industries. The possibility of a buyout is one consideration for adding a stock. The fund is available at Schwab and Waterhouse, but a trading fee is charged at both venues. FMI Focus is more correlated with the OTC market than the NYSE.  

Over half of assets at TCW Galileo Select (TGCNX) are in the top ten funds. It has only thirty issues, so veteran stock picker Glen Bickerstaff does play favorites. And to good effect: this market-risk large-cap growth vehicle has returned the annual equivalent of 33% since its start in March last year. This is almost thrice that of the Wilshire. His institutional version, which is a year older, has maintained a similar premium over the market. It helped in the recent correction that the technology weighting was only about the same for the market as a whole. Firms with a special franchise in their field are buy candidates. Net assets are only $48 million; and it's tax-efficient to boot. 

Artisan Mid Cap (ARTMX) remains the most attractive mid-cap offering for investors requiring solid up-market action. Andrew Stephens has its technology and telecommunications weightings total 46%, yet its risk exposure is a manageable 12.3. He recently trimmed down holdings to fifty-four issues, to concentrate on firms about which he has the most conviction. 

At Strong Small Cap Value (SSMVX) Charles Rinaldi runs a micro cap fund with a generous share of old economy and energy issues. About 9% is in foreign stocks. Unglamorous industries are not a problem, as that is where firms are found with prospects for growth not yet realized by most analysts. Since inception at the end of 1997 Small Cap Value provided a compound annual return of 23%, three times as much as the Russell 2000, not the six times reported here in the last issue.

Since Jerome Heppelman took over in June he has guided PBHG Mid-Cap Value (PBMCX) to a gain over four times that of the Wilshire. A willingness to take on some utilities and energy issues (23% of assets) is one reason for the resilience, but this fund has gained on average a third more than the Wilshire in the three up-market periods since he took charge. One concern is that he is the only value analyst at this shop and that he manages all the value funds except Large Cap Value.  

The only negative about Thornburg Value (TVAFX) is the 4.5% load, but there aren't many large-cap value funds that grow as consistently. So far this year and in all but 1988, this low-risk blend vehicle beat the S&P 500, a good proxy for large-caps. Its fifty-two issues are well spread out over sectors; foreign issues add up to 16% of invested assets. Bill Fries usually starts out with a mid-cap purchase but won't sell just because the stock becomes pricey. Hanging on to issues that still have growth in them have led the median market cap from mid-cap to large-cap territory. This tendency to tenacity is also very easy on taxable shareholders.

Copyright © 2000 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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