- The Washington Times - Tuesday, May 2, 2006

Diversity is ticket to easier ride


Small stocks that pack a punch are making fans of U.S. investors worn down from several years of bargain hunting.

They are increasingly willing to shell out a little more money to take a turn at the excitement of small-cap growth stocks.

Because aggressive opportunities can be found almost anywhere, that means stocks of smaller firms specializing in anything from fine art auctions to aircraft simulation training.

The average small-cap growth fund is up 15 percent in 2006 and 31 percent over the past year, Lipper Inc. reports. That eclipses the 8 percent and 21 percent returns, respectively, of the average U.S. diversified stock fund.

Small-cap growth also exceeds the average small-cap value fund’s return of 12 percent in 2006 and 25 percent in the past year. Small-cap value had dominated growth after the tech bubble burst.

“In 2000, there was wide disparity between the cheapest small-cap stocks and the most expensive ones, but that has now become much narrower,” said Matthew Hart, portfolio manager for the Van Kampen Small Cap Growth Fund. “The tail wind from a robust economy is also helping to fuel a shift back into growth.”

Growth investing bets on fast-growing companies while value investing seeks out underpriced choices. In a display of fluctuating emotions, investors dove headfirst into growth in the late 1990s, then did a belly-flop into value in 2000.

“It is hard to predict when one asset class will have better returns than another,” Mr. Hart said. “So take a diversified approach and include different styles in a personal portfolio.”

The Van Kampen fund is a star in its category with a 20 percent gain so far this year and 41 percent increase over the past 12 months. Mr. Hart considers growth to be more sustainable than it had been the past couple of years and can see many more small-cap than large-cap investment ideas.

His largest holdings include:

• Sotheby’s Holdings (Class A shares), the famous auctioneer of authenticated fine art, decorative arts and collectibles.

• United Industrial, a Hunt Valley, Md., maker of defense systems such as unmanned aircraft systems, training simulation systems and aircraft test equipment.

cInvestment Technology Group, a specialized brokerage firm and trading-desk technology company.

• Hologic, a manufacturer of diagnostic and medical imaging systems for women’s health care such as mammography and bone density testing.

• Wesco International, a distributor of thousands of products primarily in electrical supplies and equipment.

• The Men’s Wearhouse, a retailer of men’s apparel in the United States and Canada whose merchandise includes designer, brand name and private labels.

Small-cap growth’s time in the spotlight is never assured.

“I’m as surprised as anyone at the kind of returns small-cap growth has this year, but I don’t think it’s too late to invest,” said Ned Brines, manager of the Provident Investment Counsel Small Cap Growth Fund.

The fund is up 17 percent in 2006 and 28 percent over the past 12 months. Mr. Brines expects a slowing economy, which is great for growth stocks.

His largest holdings are Ventana Medical, a maker of clinical systems for analyzing tissues and drug; Headwaters, a developer of products for energy and construction materials industries; and Equinix, which connects networks through the Internet.

• Write to Andrew Leckey at [email protected]aol.com.


Like Mr. Hart, Mr. Brines builds company diversity into his portfolio.

When selecting any small-cap growth fund, long-term track record and quality of management count most because so many different stocks are held in the typical portfolio. It differs from a large-cap portfolio that often has fewer and more recognizable stock names.

“In growth funds, those doing best this year are investing in smaller, gutsier companies,” said Laura Pavlenko Lutton of Morningstar Inc. “I’m pleased to see the emphasis switch away from small-cap value because there isn’t a lot to invest in there that hasn’t already been closed to new investors.”

The No. 1 performer in the small-cap growth category, though, is closed to new investors. The $136 million Bridgeway Ultra-Small Company Fund has a 26 percent return in 2006 and 46 percent over the past 12 months.

Using a quantitative model for a portfolio that is 80 percent microcap, Bridgeway founder and portfolio manager John Montgomery has had a big winner in the Hansen Natural energy company that is enjoying booming sales, while his stock in drug-testing firm SFBC International was hurt by a government probe of that firm’s treatment of clinical trial participants.

“We like the Bridgeway fund company a lot,” Mrs. Lutton said.

Mr. Montgomery, who runs 10 Bridgeway funds, was in mass-transit management before creating his fund company. That seems a strange background until you consider that the job of a small-cap manager is to direct the daily traffic flow of stocks in an ever-active, ever-volatile portfolio.

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