Small- and Mid-Cap Funds

Mutual Funds

Small- and Mid-Cap Funds

Like his colleague and pal Will Danoff, Joel Tillinghast has compiled a tremendous long-term record running his fund, Fidelity Low-Priced Stock (FLPSX). Under Tillinghast, the fund has returned an annualized 11% since its inception in December 1989, an average of two percentage points per year better than a benchmark of midsize-company funds.

Tillinghast concedes that Low-Priced, which purchases only stocks that sell for $35 a share or less, is "a bit of a gimmick." But there's nothing gimmicky about his stock-picking discipline. Tillinghast says he looks for consistently profitable companies with strong market positions and balance sheets, high recurring sales, and relatively clear future trends.

After being shut to new investors for five years, T. Rowe Price Mid-Cap Growth (RPMGX) is open again. Brian Berghuis has run this fund with finesse since its inception in June 1992. Over the past decade, it has resoundingly beaten its benchmark by an average of five points per year.

Berghuis says he favors low-cost producers and companies that hold patents and strong brands, which tend to generate higher returns on invested capital. These days he's redoubling his focus on balance sheets to mitigate financial risk. He's light on consumer stocks, including retailers, but he likes the alternative-energy sector.


T. Rowe Price Small-Cap Value (PRSVX) is an enormous fund that in lesser hands would lapse into index-hugging mediocrity. But Preston Athey, who has run the fund since 1991, consistently beats the small-company value index over long spans with lower volatility than the index. Athey likes to hold a broadly diversified portfolio of about 300 stocks. One way he dampens volatility is by holding companies with healthier balance sheets than the norm.

When industries are out of favor, he's probably buying; when sectors are surging, he's likely selling. Lately he's been shopping in the retail sector.

Cliff Greenberg is thrilled with the portfolio he's been able to assemble for Baron Small Cap (BSCFX). He says he's buying high-quality growth companies at extremely favorable valuations. The trouble is, markets are unlikely to rebound until "the world rights itself," the timing of which neither Greenberg nor anyone else can predict.

For instance, he's been buying Covance, which provides research services for drug developers, after the stock has fallen by two-thirds. Greenberg is confident that big pharmaceutical outfits will steadily increase the share of research services that they outsource.


Like many fund managers, Chuck Akre, of FBR Focus (FBRVX), is investing on the assumption of a diminished American consumer. "The consumer is strained, but he won't go away," says Akre, who works in Middleburg, Va., far from the nation's financial centers.

So Akre holds stocks such as CarMax, the leading retailer of used cars, and O'Reilly Auto Parts, which helps auto owners repair their aging vehicles. And then there's California-based 99 Only Stores, which sells only merchandise that costs less than a buck. "Almost everything is diminution in this economy," says Akre.

Balance sheets are king this year. Earnings are generally dreadful, but those companies on secure financial footing will live to fight another day and will quite likely pick up market share. Jim Barrow and Mark Giambrone, of Vanguard Selected Value (VASVX), say they're really digging into balance sheets to confirm, for instance, that companies have plenty of cash to meet maturing loans or bonds.

What they've been buying are premium companies whose stocks have been trashed along with lower-quality fare. For instance, they bought shares in GameStop, the leading retailer of video games and consoles, and International Game Technology, the dominant maker of slot machines.

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