Micro Cap, With $60 Million, Is 25-Day Wonder

The Montgomery Micro Cap Fund may have set some sort of record for investor enthusiasm during its first month of existence.

This no-load portfolio opened for business Jan. 3 and has already closed its doors to additional shareholders, effective Saturday. During that brief span, the fund exceeded its goal of raising $60 million without advertising and with scant public announcement.

“We felt that it was important to go slow,” says John Story, executive vice president of Montgomery Asset Management in San Francisco.

The fund will reopen in a few months, but not until it has been able to invest the initial cash influx in promising small companies. Management is shooting for an eventual fund size of $250 million.

The micro-cap approach refers to investments in some of the tiniest corporations, at least by Wall Street standards.

A firm’s capitalization, or “cap,” is measured by its stock price multiplied by the number of shares outstanding.

Mutual funds that invest in small companies generally tend to buy those with capitalization in the range of $500 million, according to Morningstar Inc., the Chicago research firm. Montgomery Micro Cap intends to put most of its cash into slightly smaller companies with market values of less than $425 million.

Both numbers may seem big enough until you consider that America’s largest corporations--those in the Standard & Poor’s 500 index--weigh in at nearly $14 billion each on average.

Driving Montgomery Micro Cap’s enthusiastic reception wasn’t the approach, as many rival funds go for small stocks. It was Roger Honour, the senior portfolio manager.

The University of Louisville graduate guided the sibling Montgomery Growth Fund to a sizzling 20.9% gain in 1994, when most stock portfolios lost ground. The fund’s asset base went to $593 million from $4 million during the year.

Before joining San Francisco- based Montgomery in 1993, Honour had served in a fund-managing capacity Twentieth Century Mutual Funds of Kansas City and Alliance Capital Management in New York.

His Alliance Technology Fund rose 54.2% in 1991 and 15.5% the following year.

With Micro Cap, Honour will follow a three-pronged approach that essentially involves buying solid companies with good profit potential that are selling at reasonable prices in the stock market.

Another reason for the fund’s enthusiastic reception may have to do with the Montgomery name.

“This was a research house with a very good reputation in growth stocks even before they started with mutual funds,” said Steve Matuszak, who recommended Montgomery Micro Cap through his Fax on Funds investment-advisory service in Reno, Nev.

The four-year-old fund family has already garnered more than $2 billion in its 13 portfolios.

Also helping Micro Cap score with investors was Montgomery’s announcement in its current prospectus that it intended to close the fund before it got too large.

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While this move hurts Montgomery in the short term--because its management-fee income varies with the amount of its assets--the smaller size makes the portfolio more nimble and easier to run.

Funds that buy small stocks face some major obstacles when they grow too large.

In particular, it’s hard for a big buyer such as a mutual fund to purchase many shares in a little company without bumping up the stock price in the process. Also, funds are legally restricted as to how large a stake they may own in any one company, as regulators don’t want to see them becoming controlling shareholders.

When small-stock funds close their doors to limit their sizes, it’s generally viewed as positive for their shareholders.

“More funds should close (periodically) to digest the money they receive,” Matuszak said.

That sentiment is shared by Michael Stolper, publisher of the Mutual Fund Monthly newsletter in San Diego, but he also pointed out a disadvantage when it comes to expenses: By keeping assets down, the fund has fewer shareholders over which to spread its fixed costs. This results in a higher per-share expense burden than would otherwise be the case.

In fact, Montgomery Micro Cap weighs in with a meaty 1.75% in estimated annual expenses--lofty even for small-company funds, which as a rule tend to be relatively costly to run.

Investors who rushed to buy shares in Micro Cap during the 19-day window are counting on the hot-handed manager to more than compensate for this drag.