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Winners Come in All Sizes

Thompson's mastery over the index has earned kudos from Morningstar analyst Langdon Healy, who readily admits that it's tough to garner outsized returns when buying outsized companies.

"Historically, most actively managed large-blend funds haven't been able to edge past cheap S&P 500 Index funds," says Healy. "When we give the nod to a manager here, where markets are at their most efficient, we are to some extent going out on a limb. With that as a backdrop, we think this fund is a serious alternative to an S&P 500 index fund."

So what's Thompson's secret for hunting Goliaths?

Thompson buys quality companies trading at prices at the low end of their 10-year historical price-to-earnings range and sells them when they breach the high end. In other words, the fund looks for companies whose earnings growth might have slowed temporarily but which will regain their momentum further down the road.

Thompson offers his recent decision to buy additional shares of Viacom (VIA - Get Report) as an example of his contrarian approach. He says the stock is trading at close to 16 times free cash flow -- the most widely used metric for media companies -- when it has been upwards of 40 in the past.

Hold on a minute. Scooping up slumping stocks? Striking when multiples are depressed? Buying Viacom? For a fund with "growth" in its title, aren't those classic value manager moves?

"Growth investors tend to pay too much for momentum, and value guys have the bad habit of sticking with junky companies too long, hoping things get better," says Thompson, responding to a question frequently asked by investors who would rather he confined himself to a single Morningstar-style box. "Sometimes it makes sense to pay up for quality, and sometimes it doesn't."

Good Funds Come in All Sizes
Performance Comparison
Fund/Index Ticker YTD % Annualized Returns % Expense Ratio%
3 Year 5 Year 10 Year
Thompson Plumb Growth (Mega) THPGX 0.26 4.70 9.11 17.94 1.07
Perritt Micro Cap Opportunities (Micro) PRCGX 1.99 19.56 18.74 15.65 1.44
Meridian Growth Fund (Mid) MERDX 1.12 8.79 13.38 14.56 1.06
S&P 500 -0.18 -1.62 -3.38 11.82 --
Source: Morningstar (Annual returns through 7/19/04)

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