Best new funds for a promising new year

Kiplinger's Personal Finance Magazine, Jan, 1998 by Steven T. Goldberg

In a capacious 24th-floor office with a dazzling view of Manhattan, two dozen Baron Asset Management employees hoist paper cups filled with Dom Perignon to toast the close of the first trading day for a new fund, Baron Small Cap. "Congratulations, Cliff," fund official Morty Schaja says to manager Cliff Greenberg, an intense man in a rumpled blue shirt. Greenber-g breaks into a smile as his colleagues applaud.

Even in a sputtering bun market, this kind of scene was being played out often in late 1997. Not counting new share classes, 166 new stock funds opened to investors during the first ten months of last year. Most should be ignored until their managers have established track records. Greenberg, for instance, comes to Baron from a private hedge fund. This is his first mutual fund.

Yet among the funds begun since last March 31 (or now in the planning stages), seven hold exceptional promise because their managers do have public track records -- and darned good ones at that.

These exemplary newbies include three that intend to own only a limited number of stocks -- that is, only the issues that the manager is most enthusiastic about. Usually you'd want to wait and see how this approach works out. But the managers of these funds are already experienced at running concentrated funds, so much of the uncertainty is removed.

Why even bother with start-ups, when there are few, if any, results on which to rely? Because some new funds possess attributes that their older brethren may lack:

* More agility. While funds with top records often wind up bloated with assets, new funds are smaller and more nimble, which allows their managers to buy and sell stocks without disturbing their share prices.

* A clean slate. Existing funds may contain lots of stocks their managers aren't excited about anymore but aren't ready to dump. Not so with new funds.

* A sharp focus. While older funds often end up with 100 or more stocks in their portfolios, new funds can focus on a manager's best ideas.

These factors all appear to contribute to the so-called new-fund effect. Research shows that many rookie funds -- particularly aggressive-growth funds and funds that specialize in stocks of smaller companies -- tend to outperform their peers in their first year. (For a look at new funds we highlighted last year, see "Update," on page 12.)

Of course, new funds face their own set of pitfalls. For example, don't expect them to do well if the overall stock market is in trouble. Aggressive funds in particular are vulnerable when stock prices are in retreat. Sometimes experienced managers try a different investment strategy with a new offering, and new strategies don't always work. Moreover, new funds are where you are most likely to find untested managers.

These seven no-load funds seem likely to steer clear of such traps. All total returns are to November 1.

BJURMAN MICRO-CAP GROWTH

Opened March 31; minimum initial investment, $5,000; call 800-227-7264 for a prospectus

George D. Bjurman & Associates is not a household name, but the Los Angeles firm has managed money since 1970 and has $2.2 billion in private accounts. Over the past five years, its private accounts that specialize in stocks of the smallest companies have returned an annualized 27.4%, compared with 15.1% for the Russell 2000 Growth index, a benchmark for small-company growth managers.

Micro-cap Growth, the firm's first fund, couldn't have started at a more opportune time -- mere weeks before stocks of small, rapidly growing companies emerged from a brutal, ten-month-long bear market. In its first seven months, Bjurman (pronounced BURR-man) Micro-Cap returned 54.3%, versus 16.2% for the Russell 2000 Growth benchmark. However, it lost 12.5% in the October 7 to October 27 sell-off, while Standard & Poor's 500-stock index fell 10.8%. Bjurman manages only about $75 million in micro caps, which it defines as stocks with a market value (share price times number of shares outstanding) of less than $300 million.

This fund is on the lookout for fast-growing companies. Its primary stock-selection tool is a computer data base, which it filters for stocks that score best in earnings growth for the past 12 months and for estimates predicting the next 12.months. Weighting is also given to the number of analysts who are raising their estimates of a stock's future earnings (the more the better) and to a stock's price-earnings ratio in relation to its rate of expected earnings growth (the lower the better). The typical holding among the 75 or so that Micro-Cap owns sells at 24 times the next 12 months' earnings and is expected to increase its earnings at a 26% annual pace over the next five years.

Bjurman analysts don't visit micro-cap companies before investing. "We'd rather see the bottom line of what they're doing than hear what they say they're doing," says Thomas Barry, the firm's chief investment officer and lead manager of the fund.

Barry says the fund will close when assets (which recently stood at just over $1 million) reach $250 million. "We don't want to get too big," he says.