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Small- And Mid-Cap Winners

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 September 15, 2000.

Whatever the next move in the market, it might pay to see which funds have been beating the market recently and have a high rating based on longer periods of good behavior in rising and falling markets. 

Funds with high Equity Fund Outlook (EFO) ratings that exceeded the market since the high on July 14th. Since then the market has declined 2.6%. The EFO Market Index, which is 40% weighted with the OTC Composite, lost 7.8%. Mid-, all- and small-caps funds were the winners. Shown in the report is the percent weighting in technology. None of this select set had more than half of assets in this sector. 

Berger Mid Cap Value (BEMVX) has been resistant in recent down markets. Over its twenty-five month life its has provided a total annualized return of 27%, eight points more than the market and almost twice that of its peers. This is all the more interesting in that it is a true value fund: its weighted average P/E is only half that of the S&P 500. And its ISQ of 20 is among the top five in our data base. Mid Cap Value is managed by Robert and Thomas Perkins, who headed the former Omni Fund (now the closed Berger Small Cap Value). While the largest sector is financial services, sectors not seen in the hot funds of recent years are well represented also, such as industrial cyclicals, energy, even a few utilities. Its Tax Impact is average. Net assets are a pleasantly small $28 million.

The two institutional Brazos funds seem like a promising path to the all- and mid-cap universe. The median market cap of only $3.7 billion at Brazos Multi-cap Growth (BJGRX) reflects the small and mid-cap focus of John McStay Investment Counsel, the Dallas management firm. Only 24% of assets are in jumbo or large caps; half are in mid caps, and 24% are in small and micro caps. Its 56 issues are spread over all sectors except utilities and no sector is more than a third of assets. This diversification is one part of their risk control process; the others are selling on reaching valuation targets and not letting any stock grow to more than 4% of assets. 

Brazos Mid-Cap Growth (BJMRX) was launched at the end of 1999 and up 36% in a period in which the market gained only 1%. It should not be surprising that eighteen out of the twenty-five largest positions in Multi Cap are found in Mid Cap. So there seems little point in owning both, especially when you have to pay a commission. IRA and Keogh accounts will have no trouble acquiring these funds at Schwab with an investment of at least $1,000. If you decide that you want to have a Brazos offering in your retirement plan account and you probably should choose the one that will improve your portfolio allocation.

The managers at Kornitzer Capital Management who run blend Buffalo Small Cap (BUFSX) look for firms likely to evidence consistent growth and cash flow over the long term but refuse to overpay. The result is a steady market-risk offering that has regularly outperformed its small cap brethren. Over its 2.4 years it has delivered a total return almost five times that of the Russell 2000. Portfolio turnover was a moderate 42% last year. Its median market cap of $1.4 billion is at the larger end of the range. It's Tax Impact is only 1.0 and assets are only $39 million.  

At Strong Small Cap Value (SSMVX) Charles Rinaldi looks for firms with good earnings growth potential but not yet over-priced. And not too big: its median market cap is only $414 million. Its large (22%) energy holdings illustrate his willingness to be contrary in finding the values. If he can't find enough values he isn't hesitant to hold cash (now 14% of assets). Since birth at the end of 1997 it has delivered twice the return of the Russell 2000, while maintaining a risk exposure of only 8.5. Despite an average portfolio turnover (96% in 1999), the fund has made no distributions yet; he must do some loss-capture selling from time to time. Small Cap Value will be converted to a broker-sold offering on November 30th. 

For PBHG Small Cap Value (PBSVX), since its current manager, Jerry Heppelman, took over in June last year, the 46% annualized total return is three times that of the Russell 2000. Risk exposure here is market (10.3), portfolio turnover is high (353%), but, so far, Tax Impact is modest (2.5). With total net assets of $138 million this fund is a bit bigger than the others, but it goes with the median market cap of $1.3 billion.  

Artisan Mid Cap (ARTMX) continues to lead its peers. Some recent movers were Internet service providers, e-business and wireless firms and energy providers. Manager Andrew Stephens seeks firms with an advantage in their industry that makes for continued strong earnings growth. Some recent purchases have been in airplane landing gear and communications equipment. Its Tax Impact is just below average. Median market cap: $4.7 billion; total net assets: $203 million. All but very conservative portfolios should have this fund. 

Any-cap Westcore Select (WTSXL) is still less than a year old and its manager, Gerald Peterson, though experienced, has no fund management record so it's been hard to say buy', even though its rating is high. At first glance it seems a case of everything coming up roses: its total return since launch is 170% and shareholders in on day one have had to pay only market risk for this exceptional return. But most of the early boost was from IPOs, a scenario hard to repeat. Since the end of February Select has gained only 3.6% vs. 2.9% for the market. And in the last three months it has under-performed the Russell Midcap Growth Index by four percentage points. It would be best to wait for another broad upturn in the market against which to get a better reading on its real growth potential.

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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