Small-Cap and Mid-Cap Funds Lead Rebound


The momentum in the second quarter was with mutual funds that focus on small and mid-size stocks, continuing a major market shift that began in mid-2000.

If you're shopping for funds in those categories, the accompanying charts might be one place to start. They show the 30 biggest gainers in the quarter in each of four categories: small-cap growth, small-cap value, mid-cap growth and mid-cap value.

Looking at just one quarter's numbers can raise the risk that investors will fall into the trap of performance-chasing--which amounts to "rear-view mirror" investing.

Still, the second quarter's results may prove significant in the long run, if the spring turnaround in stocks marked the end of the 2000-2001 bear market.

In the case of most growth-stock funds, the quarter's big winners were bouncing back from steep losses over the previous 12 months largely caused by heavy technology stock bets.

There's no guarantee that the growth funds that rebounded the fastest in the second quarter will continue to lead the way in a market recovery, but their portfolios at least had what other investors wanted most in the second quarter.

Small-cap growth funds leading the pack in the quarter included Roulston Emerging Growth, which rocketed 39.1%, trimming its 12-month loss to 56.6%; Janus Venture, which climbed 25.5% in the quarter but still lost 36.4% in 12 months; and Fremont U.S. Micro-Cap, which rallied 25.2% in the quarter but slid 21% in 12 months.

Mid-cap growth funds leading their sector included Baron iOpportunity, up 37.9% in the quarter but down 25.1% in 12 months; and Berger Mid Cap Growth, up 22.9% in the quarter but also down 42% in 12 months.

Some growth funds not only led in the quarter but also had strong 12-month returns--a rarity for the sector. They include a number of funds in the Wasatch family.

Many value-oriented funds, meanwhile, scored big gains in the quarter that built on hefty returns over the last year. Wall Street has become much more enamored of value stocks, which typically sell for reasonable or cheap price-to-earnings ratios compared with many classic growth stocks.

In the small-cap value category, the Royce Funds dominated the list of the quarter's leaders. Royce Low-Priced Stock, for example, surged 22.7% in the second quarter and is up 34.5% in 12 months.

Other winners included Oakmark Small Cap, up 19.1% in the quarter and 31.5% in 12 months; and Turner Small-Cap Value, up 19.4% in the quarter and 38% in 12 months.

Mid-cap value funds with continuing strength include TCW Galileo Value Opportunities, up 16.7% in the quarter and 44.3% in 12 months; Muhlenkamp, up 13.9% in the quarter and 21.7% in 12 months; and Longleaf Partners, up 11.3% and 32.8%, respectively.

TCW Galileo Value Opportunities, a $189-million fund managed by Susan Schottenfeld and Nicholas Galluccio, typifies the consistently strong value performers.

Schottenfeld and Galluccio look far and wide for value, said Morningstar analyst Kelli Stebel. The fund won't hesitate to bulk up in nontraditional value areas, such as tech, which accounted for 27% of the portfolio at the end of May. The managers weren't buying former Internet highfliers, however, but rather beaten-down semiconductor equipment stocks such as KLA-Tencor and Teradyne.

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