A small cap fund outperforms peers in risky world of small-company stocks Phoenix Hollister Yields moderate return.
MATTHEW LUBANKO; Courant Staff Writer
07/31/1999 The Hartford Courant Page 1
(Copyright @ The Hartford Courant 1999)
The S&P 500 lost 2.07 percent this week.
The Dow Jones industrial average lost 2.3 percent.
A bee sting, say some investors.
A step toward value -- and sanity -- says Phil Bertelsen, manager of the Phoenix Hollister Small Cap Value Fund (ticker symbol: PDSAX). And if leanings toward value continue, Bertelsen reasons, it's likely more money will flow to small cap funds -- where stocks are comparatively cheap.
Bertelsen's fund -- offered by Hartford-based Phoenix Investment Partners Ltd. -- is up 9.35 percent since Jan. 1. Though Phoenix Hollister has lagged the large-company indices since its November 1997 birthday, it has outperformed most of its small cap peers.
It eked out a 3.33 percent gain in 1998, compared to a 2 percent decline by the Standard & Poors Smallcap600 Index and a 4.98 percent decline in the Russell 2000 Index, both measures of small cap stocks.
Bertelsen said he expects better days ahead. "We're seeing the wallflowers dance again and I think this dance will last," he said.
In the second quarter ended June 30, the Russell 2000 was 14.28 percent beating the S&P 500 (up 13.08 percent) and the Dow Jones industrial average (up 7.35 percent).
Part of Phoenix Hollister's continued appeal, Bertelsen said, is a defense mechanism large-cap growth funds currently lack: Its collective price-to-earnings ratio is about 11.5, compared to a PE of 25.7 for the Dow, and 31.7 for the S&P 500.
Stocks that trade at lower-than-average earnings multiples often have less downside risk, said Christopher Traulsen, equity fund analyst with Morningstar Mutual Funds newsletter.
Yet investors who hope to ride Bertelsen's small-cap value fund to further success should take note of a few possible sinkholes down the trail. The fund carries a 4.75 percent load, a slice that can drag above-average returns to below average.
Small-cap stocks also are risky. They have little following on Wall Street, and small companies that have bad quarters are quickly abandoned -- and not quickly forgiven, Traulsen added.
Yet the fund's top holdings -- Claire's Stores (ticker symbol: CLE), Dallas Semiconductor Corp. (ticker symbol DS), Atmel Corp. (ticker symbol: ATML), and C-Cube Microsystems (ticker symbol: CUBE) -- contain nary a bank, insurance company or brokerage house.
Claire's looks attractive today, Bertelsen said, because it has a defensible niche. "They sell junky jewelry to girls between eight and 13. Nobody else is competitive within that narrow niche," Bertelsen said. Claire's earnings have also grown a compounded 24.9 percent a year over the last five years.
Dallas Semiconductor, Bertelsen said, is proof that value does not reside solely in Rust Belt America. "This company was regarded as a has-been. We bought it at 17. It's now above 50, and we think it has a little more left," Bertelsen said.
Atmel Corp. (ATML) represented a chance to buy a stock that was oversold.
"It's like the place your mother told you not to go at night. But they have a unique market, and they have virtually no debt," said Bertelsen of the California company that specializes in programmable memory circuits. Atmel, however, may have little juice left to sustain its upward run, Bertelsen said.
C-Cube also represents a bargain in a beaten down sector. "Video compression {technology that makes efficient use of available transmission capability} is complicated, but it's in such great demand," Bertelsen said.
Never mind that Bertelsen's top four choices are obscure or, in some cases, have seen better days.
As a value investor, Bertelsen sees price declines as opportunities to buy. The founding fathers of the value school were Benjamin Graham and David Dodd. Their core philosophy -- "don't buy overpriced stocks" -- is spelled out in their seminal work, "Security Analysis," first published in 1934.
Though still widely practiced, value investing has come under fire in recent years. And "Security Analysis" had, in the minds of some, come to resemble a medical encyclopedia published in 1934: quaint, outdated, and perhaps laughably dangerous in the wrong hands.
Bertelsen, however, says value will rise again.
America Online, Bertelsen said, should not be worth as much as Hewlett Packard. Amazon.com should not be worth more than Sears Roebuck. Other investors will soon realize, Bertelsen said, that it's not old-fashioned or foolhardy to bet that "McDonald's will grow again."
Beating the S&P Small Cap Index
* Since February 1998, the Phoenix Hollister Small Cap Value Fund has outperformed the Standard & Poors Smallcap 600 Index by a comfortable margin. Values are for the last trading day of each week, through Friday.
Feb. 6, 1998 0%
July 23, 1999 Phoenix Hollister smallcap 13.44%
S&P smallcap 0.93%
PHOTO: (color), PHOENIX INVESTMENT PARTNERS LTD. GRAPHIC: (color); PHIL BERTELSEN is the manager of Phoenix Hollister Small Cap Value Fund. The fund has outperformed most of its peers, and Bertelsen says small caps will get stronger.
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