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Slim Pickings

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 June 16, 2000.

Funds that have done well since the May low and sport an attractive rating are not numerous. Here are the best.

PBHG Small Cap Value (BBSVX) is the most attractive offering in that camp. It's hard to argue with any fund that has returned to its March high already and has a growth potential forty percent higher than the market. Our stats, by the way, reflect behavior only since Jerome Heppellman took over a year ago. He seems to have a knack for spotting sectors that are undervalued AND due for a bounce. He has maintained a heavy (18%) weighting in energy, which has paid off well. A consumer durables participation (6%) is also over-weighted vis-a-vis the market; financials are a fifth of the portfolio and, until last week, have been enjoying an uptick.

Two-year-old Buffalo Small Cap (BUFSX) held up well in the recent  decline and has always been good at outdoing its peers. Technology  and consumer cyclicals are each 23% of assets. Attractive firms are those with good cash flow and long-term prospects.This market-risk  offering has an attractive ISQ of 13.0 and a very low tax impact of  1.0%, so it would be useful in any account needing more small-cap exposure but not high risk. This team-managed blend vehicle has assets of only $35 million. It moves less in both up- and down-markets, but does offer a more concentrated portfolio, with sector allocations more in line with the heavy services and technology weightings of many better-performing funds over the last year. The stock selection style is designed to produce consistency of results over time with market or less risk. Thus the fund has both earnings-momentum and value stocks; the technology holdings are seen as firms with sustainable business models. That leaves out, in the managers' minds, most Internet stocks. Assets are only a third of what they are at PBHG Small Cap Value.

At a higher level of risk FMI Focus (FMIOX) has been tops in the small blend category for the last one and three-years. It is no longer concentrated, but most successful small-cap funds aren't: it's just too easy for a few bad apples to spoil the barrel. The reason investors should take this fund seriously is its consistency in outperformance over its three-and-a half-year life. The median market cap is getting close to the mid-cap level as its assets have grown to $100 million. So buyers could think of it as a future mid-cap fund when portfolio planning.

Brazos Mid Cap Growth (BJMCX) is run by the astute team at John McStay Investment Counsel in Dallas. Since launch at the end of 1999 it has gained 59%, partly owing to good downside resistance during the recent correction. As at all Brazos funds, the managers' selection criteria include growth in revenue and cash flow, strong management, leading products or services and potential rapid growth in earnings. The list of possible investments is further filtered  by traditional fundamental security analysis and valuation methods, including relative returns on capital and equity, reward-to-risk ratios and earnings per share growth rates relative to price-earnings ratios. The managers make it a point to visit most companies in a portfolio. Their bottom-up research often includes interviews with the company's customers, competitors and suppliers. Net assets total an attractively low $52 million. With only five months of data Mid Cap Growth presents a dilemma as the information so far is just super. Its market risk reading of 9.8 probably understates its real exposure in a future downturn as new cash coming in to build the portfolio has not all been invested. Allowing for a fifth or a quarter more risk and no change in the growth potential, the figures would still look good. Mid Cap Growth would be useful in a portfolio that can accept more above-market risk. 

Artisan Mid Cap (ARTMX) continues to be the top mid-cap choice for funds with some history. Andrew Stephens views holdings and candidates on three factors: franchise (how unique is the firm's services or products), value (does the market not yet know that), and trend (is this firm and its industry on a sustainable uptrack). Based on earnings estimates for 2000, he figures the portfolio median price to intrinsic value is 74%, and that the weighted average growth rate is 15%. This is another way of saying that he has a growth-at-a-reasonable-price (blend) fund and that the growth factor is strong. 

Concentrated Turner Top Twenty (TTOPX) is an any-cap fund whose median market cap ($60 billion) has been well into large-cap territory most of its one-year life. Unlike other Turner funds this one is not sector neutral. Indeed, it is presently virtually a technology fund, with many big names in the top-ten holdings. What makes it attractive is the reward/risk tradeoff: it's ISQ is 13.6, which is the highest among class 1 funds, where the average ISQ is a neutral 9.9. But unlike a tech fund, the sectors could change when its contributing managers (each with his best picks) find other opportunities. The portfolio also contains a few smaller obscure items, which help it to differ from the crowd.

Buy the best and keep 'em could be the motto at White Oak (WOGSX), where the managers first select the most promising industries, then find a few of the best firms in each, follow them closely and hang on until there is good reason to sell. The industries they deemed most promising in recent periods have been technology, financial services, and healthcare. Net assets total a substantial $3.6 billion, but then its median market cap is $103 billion.

A less risky large-cap choice, TCW Gallileo Select Equities  (TGCNX) can be considered moderately concentrated, with thirty issues and 52% of assets in the ten largest holdings. Here investors get forty percent more upside movement in rising market periods for a little more than market risk in down periods. Manager Glen Bickerstaff  is a proven veteran investor. The tax impact for its older institutional version is a high 8.4, so the best use for most investors might be in a tax-deferred portfolio, should this pattern repeat here.

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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