Info about small cap fund in which AGY is the largest holding.
KANSAS CITY (Dow Jones)--At a time when many small-cap funds are struggling and posting poor returns, the Buffalo Small Cap Fund is in the enviable position of having a stronger performance than many of its peers.
Launched last April, the $14 million fund has returned 4.26% so far in 1999, compared with a loss of 0.78% for all small-cap funds, according to Lipper Inc., a firm that tracks mutual fund performance. In the past year the fund has returned 0.93%, while other small-cap funds are down 12.15%, on average.
While those might not be stellar numbers when compared to the returns from blue-chip stocks, they are better than the fund's benchmark, the Lipper Small Cap Fund Index. The index has returned 0.23% year-to-date, and is down 11% in the past year.
Kornitzer Capital Management Inc. is the subadviser for the fund. Jones & Babson Inc. is the distributor for the Buffalo Funds group.
The fund's three co-managers - Thomas Laming, Kent Gasaway and Robert Male - attribute the fund's success to a number of factors, including a team-managed approach. Each manager is responsible for researching specific sectors, and Laming said that has led the fund to being more diverse than some other small-cap funds.
While the fund has a good dose of consumer-cyclical and technology stocks, it also has a fair amount of energy and financial stocks.
"I think a lot of small-cap funds seem to be more sector oriented, perhaps retail or technology oriented," Laming said. "We always seem to have one or two industry groups that have done well, even though small caps have treaded water."
With a median market capitalization of about $614 million, the fund has also stayed true to its investment philosophy of containing stocks that have market capitalizations of $1 billion or less. When a stock surpasses that number, it gets sold.
For example, when Chubb Corp. (CB) announced in February that it would acquire Executive Risk Inc. (ER), a Simsbury, Conn., company that underwrites and markets executive and professional liability policies, Executive Risk's shares were sold shortly afterward.
"We bought it at the fund's inception in the mid-30s," Male said. "It got beat up from Y2K concerns and problems, and then Chubb bought it at a 65% premium to where the stock was selling at the time."
Fund Uses A Blended Style Of Growth And Value Stocks
Buffalo's strong performance can also be credited to its blended style of investing in both growth stocks, which have been a market favorite, and value, which have been struggling. But the percentage of each in the fund can vary, and each company is considered on its own merits and not whether the stock is value or growth.
"The blended strategy can make sense for a lot of investors because while you want to capture both value and growth, you don't necessarily want to do it with two small-cap funds," said Christine Benz, a senior fund analyst at Morningstar Inc. in Chicago.
Companies within sectors that can or are taking advantage of long-term trends are also candidates for the fund. For example, the number of people in the age bracket between 45 and 54 are expected to increase more than 27% during the next 10 years, and the number between the ages of 55 and 64 will also increase, according to federal government statistics. Because those age groups tend to have a fair amount of discretionary income, companies in the gaming and leisure sector, the financial-services sector and those that make higher-end products could be attractive additions to the fund.
Buffalo has a total of 68 stocks in its portfolio, with an annual turnover rate of 34%. Its expense ratio is 1.02%.
Argosy Gaming Co. (AGY), an Alton, Ill., company that owns and operates riverboat casinos, is the fund's largest holding at 3.4%. Ethan Allen Interiors Inc. (ETH), a manufacturer and retailer of home furnishings located in Danbury, Conn., is the fifth-largest holding at 2.6%.
Gasaway said Argosy was a stock that had fallen under the radar screen of most analysts, partially because it had a lot of high-cost debt. But new management was hired about a year ago, including a new chief executive, and Gasaway said Argosy is now posting better numbers and is refinancing its debt at a lower interest rate.
Argosy has been in the fund since it opened, when it was bought for between 2 and 3 a share. It's now trading above 7.
Investors have given more credence to small-cap stocks in the past few weeks, and the three managers agreed there are early signs that the group is in for a turnaround. Gasaway said the problems outside the U.S. have hurt value and cyclical stocks.
But with certain parts of the world slowly beginning to recover, Gasaway said investors are taking some of the profits they've made in large-cap stocks and using them to buy value and small-cap stocks.
"This could be temporary but it's going to come at some point, even if it's in fits and starts," he said.
- Desiree J. Hanford; 314-588-8443;
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