Small- and Mid-Cap Funds Prove to Be Big Story This Year

Big-name stocks dominated Wall Street so decisively in the last half of the 1990s that many investors all but gave up on small- and mid-size stocks.

But look who’s back: In the first half of 2000, small- and mid-size stocks far outran their blue-chip brethren.

Mutual funds targeting small-capitalization growth stocks rose 9.9%, on average, in the first half, and funds targeting mid-capitalization growth stocks fared even better, up 10% on average, according to Morningstar Inc.

By contrast, funds that own large-cap growth stocks eked out a 3% gain in the half, on average.

The resurgence of small- and mid-cap growth funds picked up steam in the fourth quarter of last year and continued in the first quarter of 2000.

All three growth sectors pulled back in the second quarter, but small-cap growth and mid-cap growth funds held onto far more of their first-quarter gains than did large-cap growth funds.

The Times asked Morningstar to rank small-cap and mid-cap growth stock funds by percentage return in the first half of this year. Those rankings appear in the tables accompanying this story, with each fund’s second-quarter, one-year and three-year annualized return also shown, among other data.

Our thesis: Given the volatility in the stock market in the first half, those small- and mid-cap growth funds that came through it with high returns might be good places for investors who are interested in the sectors to start looking for ideas.

Not surprisingly, many of the top-performing funds had heavy weightings in technology stocks. And some of the stocks hot funds own have mushroomed to large-cap status, or close to it.

It’s still anyone’s guess, of course, whether small- and mid-cap stocks have begun an extended period of outperforming bigger stocks. If the economy were to sink into recession, or even a deep slowdown, investors could flee smaller stocks much faster than they would bigger stocks.

But every long-term trend has to start somewhere.

What follows are capsule comments on some of the first-half leaders among small- and mid-cap growth funds. Note that phone numbers for all funds are provided in the A-to-Z fund tables on the last pages of this special section.

For an explanation of other data included in the chart, including category rankings and “weak rank,� see the primer on Page S12.

Mid-Cap Growth Funds

* Nationwide Mid-Cap Growth. This $21-million fund is managed by Aaron Harris, who took over in April, and so far so good: The fund, which returned a modest 10.1% in 1999, rose 17.1% in this year’s second quarter, lifting its gain for the half to 44.7%. That made it No. 1 in the category.

As of the start of the second quarter, the fund’s leading stock positions were Veritas Software, Ciena, SDL, Cognex and Siebel Systems. Like several other top-performing funds, it benefited from a bet on fiber optics-related companies: Along with Ciena and SDL, key stakes included Corning and JDS Uniphase.

* Calamos Growth. This $54-million fund, from little-known Calamos Asset Management in Naperville, Ill., has a simple philosophy: Manager John P. Calamos focuses on companies he expects to post better earnings growth than what analysts forecast. His goal is to find undervalued growth stocks before others do.

At the start of the second quarter, leading stakes included Applied Micro Circuits, Atmel, Nvidia, Triquint Semiconductor and Silicon Storage Technology. Non-tech holdings included power producer Calpine, whose shares have more than doubled this year.

The fund gained 5.7% in the second quarter and 42.5% in the half.

* Turner Top 20. The 1-year-old fund, up 32.2% in the first half and 194.8% since inception, borrows its philosophy from Mark Twain, who said in 1894, “Put all your eggs in one basket--and watch that basket.�

Unlike diversified funds, Top 20 is concentrated, holding only the 15 to 25 stocks the management team likes best. It’s a style that often results in volatile performance.

Though the tech-heavy, $159-million fund can invest in stocks of all sizes, it has leaned toward larger caps recently: Top holdings as of May 31 were Oracle, National Semiconductor, Yahoo, Tyco International and Intel.

* Fidelity Mid Cap Stock. This fund does something different from some other so-called mid-cap funds: “This one actually buys medium-size stocks,� Morningstar noted in its latest report on the fund. That’s a reminder that some mid-cap funds tend to “style-drift� into larger stocks or keep their once mid-cap holdings after they become big-cap issues.

The $4-billion Fidelity fund sticks mainly with stocks that fall within the capitalization range of the Standard & Poor’s mid-cap 400 index, making it a nice fit for the style-conscious portfolio, Morningstar says.

The 6 1/2-year-old fund is on its third manager, as David Feldman took over last August. The fund gained 28.5% in last year’s fourth quarter and was up 22.8% in the first half. As of the start of the second quarter, top holdings were Veritas Software, Nextel Communications, Kopin, Siebel Systems and Maxim Integrated Products.

Small-Cap Growth Funds

* Kopp Emerging Growth. Think of this as a technology fund in a small-cap fund’s clothing. Through March, it had a whopping 78.5% of its assets in technology stocks--higher than the allocation of some actual tech-sector funds, according to Morningstar.

The $875-million portfolio is extremely concentrated, with almost 15% stowed in one stock, fiber-optics firm SDL (now no longer a small-cap stock), and 59% in its top 10 holdings, according to Morningstar.

The fund’s big bets have paid off this year, with the fund up 53.7%. Of its top 10 holdings, four boast triple-digit year-to-date returns, and only one is down for the year.

* Navellier Aggressive Micro Cap. Thanks to a first-quarter surge, micro-cap funds have been among the top-performing funds this year. Ten of the top 25 small-cap growth funds in the first half call themselves micro-cap funds.

The $12-million Navellier fund is highly concentrated, owning just 18 stocks as of May 31, according to Morningstar. But the fund owes its performance to more than just the tech sector, which comprised a relatively tame 37% of assets, according to Morningstar. Durable-goods companies were almost 19% of the fund, service firms 17%, health care 15% and retailers 12%.

Navellier is known as a frequent trader, and that trait shows up in this fund. Its annual turnover ratio is 196%. The median market cap of its stocks is $346 million.

* Sit Small Cap Growth. This fund, up 23% this year, has benefited from bets on fiber-optics companies and chip makers. SDL and JDS Uniphase are its second- and third-largest holdings, respectively, while chip makers PMC-Sierra and Applied Micro Circuits are first and fifth, according to Morningstar.

The fund, which has 67 holdings, has about 52% of assets devoted to tech, according to Morningstar. The fund recently adjusted its stock-picking mandate to allow it to hold onto winning stocks, such as JDS Uniphase, after they outgrow the typical small-cap definition.

Compared with some of its trigger-happy brethren, the fund’s 72% annual turnover rate is tepid. The fund was a top performer in 1999, gaining 109%, and has $146 million in assets.

* PBHG Strategic Small Company. This fund has two distinct components: an aggressive-growth portion and a valuation-conscious portion, according to Morningstar.

The dual personalities have blended well this year. The hyper-growth component shone in the first quarter while the valuation portion held the fund up when the market sold off during the second quarter.

The fund, with $64 million in assets, owns 243 stocks, according to Morningstar. About 55% of assets are in tech, with energy, financials, industrials, health care and services each accounting for 6% to 10%.

Despite its strong showing this year (up 26.4% in the half), PBHG Strategic Small Company posted only lukewarm returns in 1998 and 1999, when its more-conservative half restrained performance in a momentum-driven market.