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Diversified Funds: 39-Week Wonders

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 August 11th.

The popular (with technicians) thirty-nine week measurement period is related to the length of intermediate-term market cycles. During  a rising market, a secondary correction will take the market back to the area of its 39-week average, but the moving average trend for the 39-week period will not turn down.

Over the last 39 weeks the market (with dividends) declined 12.5% and all of the trendlines are down, a bear market by definition. But there are diversified funds with solid gains, mostly those whose style was out of favor in the mad rush to large-cap and technology plays.

Boston Partners Small Cap Value II (BPSCX) lost its assistant manager in July, but David Dabora is still in charge. He follows an active approach and believes that it's his job to come up with several new buys a month. Holdings that meet his price target are sold. He looks for attractively valued stocks with catalysts for improvement. The finds could be in any sector. Some of his biggest winners, with triple digit gains, have been in lens making, clothing retailers, funeral homes and investment services. Its early small asset base certainly helped, but the outperformance has continued as assets grew; they are now at $160 million. No gimmicks here: he hasn't used any IPOs and he didn't collect micro firms or focus on a handful of names at the beginning. At least 95% of assets have to be in firms with a market cap over $100 million and issues always total at least 100. So there is reason to expect consistently. With only minimal distributions so far, Small Cap Value II is a good bet for any portfolio.

A good all-cap fund is always useful in a portfolio and there is definitely a candidate in Columbia Strategic Value (CSVFX), which has far outdone all other all-caps over its first 39 weeks. As the above case, its veteran manager, Robert Unger, has the portfolio well spread out over issues (129) and sectors and does not overweight a few holdings. The median market cap of $3 billion falls in small end of the mid-cap range. Fifteen percent of the portfolio is in foreign issues. One concern here has been the lack of public record as Unger has been mostly involved with private accounts. With 39 outstanding weeks under his belt in this new vehicle, the time has come to release Strategic Value from probation and consider it for portfolios.

American Century Small Cap Value (ASVIX) is getting better as it gets bigger, the opposite of what usually happens: its percentile ranking in its peer group is higher for the last twelve months (2/100) than over the last three years (9/100). Tom Vigers and Ben Giele, lead managers from the outset, like most of all to find candidates for buyouts; they have had several such successes. An offer to pay you more than market value for one of your holdings is every portfolio manager's dream. Like the above two offerings, Small Cap Value does not play favorites (the top ten holdings are only 20% of assets), and is well diversified in issues (96) and sectors (all covered). It shows a moderately high portfolio turnover (144% last year), and yet a low Tax Impact (a mere 0.8). With a risk exposure of only 4.6, it's an easy choice for any account.

Acquisition targets are also often found in the holdings of Berger Mid Cap Value (BEMVX), where Tom and Bob Perkins insist on good financials before they buy a downtrodden stock. Earlier this year two of its tech holdings were bought up by larger rivals. Tech holdings have increased in weighting as prices have come down and now are 17% of the portfolio. The same research team that supports the successful closed Berger Small Company Value is at work here to good effect. Basically they find stuff that other pros wouldn't touch, but has the potential to recover.

At mid-cap TCW Galileo Value Opportunity (TCGVX) the potential for fast growth is more important than at any of the above funds, so this choice is a growth-at-a-reasonable-price (blend) vehicle. Co-managers Susan Schottenfeld and Nick Galluccio look for value in all sorts of manifestations and aren't afraid to venture into un-typical value areas such as technology, where they have been in and out for the last several years depending on prevailing value. The techs now in the portfolio are not end-user Internet stocks but infrastructure firms like semiconductor-equipment and testing systems makers. Almost a quarter of assets is in tech. With only fifty- nine issues, Value opportunities is more concentrated than the above funds, but the managers don't overweight favorites. From the older institutional class we can see that it is moderately tax efficient; its Tax Impact is 2.1: not great, but manageable for taxable accounts considering its potential for above average returns.

There are several funds that may not have made the 39-week hurdle in flying colors or were not around that long but are notable for their excellent resistance in the decline since the high in May.

All-cap Ameristock Focused Value (AMFVX) has been on a one-way trip since birth at the end of last year: up. Over its first thirty-one weeks it gained 67%. Nicholas Gerber and Howard Mah look for a few good situations that are very undervalued and don't care if most of assets are in a few issues or that the total issues won't usually exceed fifteen. Right now that means almost half of assets are in several not well-known retail outfits and a third of assets are in business services, particularly temporary help agencies. Chancy? Yes, but these are the folks who run one of the lowest-risk large-cap funds, so one could figure they might be able to manage risk here too. A long acquaintance is expected: there is a 1% redemption fee on shares held less than three years.

William Blair Small Cap Growth (WBSNX) has a risk exposure of 12.8, but it's been behaving like a value fund in the current decline. In its first months at the beginning of 2000 some of the big gains were from IPOs. But just good selection of stocks that took off was and is the rest of the story. The portfolio has seventy-two issues, so there is little risk from over-concentration, and distributions so far have been very modest. Assets, only $15 million, are still small, so the three-man team should have no problem carrying on. When it's time for some growth again Small Cap Growth could be one the first choices on deck.

One-and-a-half-year-old Century Small Cap Select (CSMVX) could be classified as a sector fund, as its policy is to have at least 25% of assets in financial services and healthcare. The most recent report shows 60% in financial services and 8% in healthcare, but 21% in non-financial services; so it would be incorrect to call it a financial-and-healthcare fund. Its median market cap ($2 billion) has crept up to the mid-cap area. Whatever the recent focus, Lanny Thorndike must be making good choices as the fund has delivered an annualized total return of 35% in a period in which the market declined 10%. A risk exposure half the market and small distributions make it a fund for most any portfolio.

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.