Growth of Midwest Economy Puts Local Spin on Fund Game : Investment: Its focus on stocks in eight-state area brings 15.3% return rate in 12-month period.

While many other mutual funds are going global, the Roulston Midwest Growth Fund has done just the opposite.

And although it is way too soon to tell how the strategy will work out in the long run, the results have been pretty good so far.

This small, little-known fund, one of three started in mid-1993 by the Cleveland-based securities research and management firm Roulston & Co., concentrates on stocks of companies based or operating in an eight-state area bordering on the Great Lakes.

It is one of a very few stock funds taking a regional approach to the U.S. stock market. Given its record to date, it could soon have more competition.

In the 12 months through June 30, Roulston Midwest Growth racked up a return of 15.3%, according to Lipper Analytical Services Inc. Over that same span, the average growth fund tracked by Lipper gained a little less than 1% and Standard & Poor’s 500-stock composite index dropped more than 1%.

Midwest Growth has benefited from being in the right place at the right time. Witness the revival being enjoyed by many industrial companies in mid-America. A recent cover story in Business Week magazine heralds “America’s Heartland--The Midwest’s New Role in the Global Economy.”

But Scott Roulston, Roulston & Co.’s president and chief executive, says the fund can’t be pigeonholed as simply a collection of widget makers and farm equipment companies.

“We have a cross-section of different kinds of companies in many industries, including technology and retailing,” he said on a recent visit to New York. “It’s not just the so-called cyclical or heavy manufacturing companies.

“In fact, the cyclical stocks got beaten up in the second quarter, and we’ve still done OK.”

Midwest Growth’s aim is to seek out undervalued stocks within the range of businesses it monitors closely. “We’re looking for companies where there isn’t a lot of expectation, but where we think we see change taking place,” Roulston says.

Perhaps the most obvious examples of turnaround in Middle American manufacturing--General Motors, Ford Motor, and Chrysler--sit right on the fund’s back doorstep. But they are too well known and widely followed for Roulston’s taste.

“We can’t get our arms around the Big Three,” he says. “They’re not in the portfolio now and they’re not likely to be. I’m not saying they’re bad stocks or good stocks, but we have difficulty adding value with them in the research process.”

Some typical stocks that have been prominent holdings of the fund: U.S. Shoe Corp., a specialty retailer and manufacturer; Cintas Corp., which makes, sells and rents uniforms, and Lamson & Sessions, a producer of sewer pipe and other products.

A small fund like Midwest Growth, with just $20 million in assets, faces several hurdles on the road to proving itself. One key question is whether it can continue to post above-average performance as it gets bigger--particularly since it is so limited in scope.

“The population of companies we cover represents well over 30% of the S&P; 500,” Roulston says. “We’re comfortable that there are plenty of investment opportunities out there.

“We may miss out on the next Apple Computer, or the next Microsoft, or the next Japanese small-cap opportunity,” he acknowledges. “It’s not going to be flashy. We’re not big risk-takers. That’s not our style. We’re value investors.”

Roulston argues that the tail wind favoring the 25 stocks in Midwest Growth’s portfolio so far will keep blowing for some time to come.

“Yes, the Midwest is in favor, and I would say it’s going to continue in favor,” he says. “What’s going on in the Midwest I think is being underfollowed.