Drugs, Trucks Top 2005 Fund Wish List

Spying plenty of opportunity, fund investors are eager to get 2005 under way.

Along with Merck's (MRK Quote - Cramer on MRK - Stock Picks) blowup and Microsoft's (MSFT Quote - Cramer on MSFT - Stock Picks) dividend, a steady economic recovery and a late-year tech rally were among 2004's signature events. Now, a survey of portfolio managers finds no ready agreement on what is shaping up to be 2005's big moment -- but also no shortage of fans for both big-cap and small-cap stocks.

"The textbooks would suggest that a declining dollar, increasing deficits and higher commodities prices would cause interest rates to spike," says Eric Barden, portfolio manager for the $45 million, small-cap (TCVGX Quote - Cramer on TCVGX - Stock Picks)Texas Capital Value and Growth fund, in taking a look at what happened in 2004. "But oddly enough, interest rates barely budged."

Barden believes that cheap, abundant capital favors smaller companies that have a harder time borrowing when rates rise. That's why he sees small- and mid-caps continuing their domination over large-caps, provided rates remain low. He intends to ride truckers like Yellow Roadway (YELL Quote - Cramer on YELL - Stock Picks), J.B. Hunt (JBHT Quote - Cramer on JBHT - Stock Picks) and Arkansas Best (ABFS Quote - Cramer on ABFS - Stock Picks) to profits next year, citing their ability to feed off small businesses and local economies.

Continued small-cap domination wouldn't surprise Barden, but it would definitely rattle a number of fund managers who are expecting large-caps to finally retake the lead in 2005.

"From 2000 through 2002, it made sense for large-caps to come down based on their overbought position during the bubble," says Dan Ahrens, portfolio manager for the $20 million (VICEX Quote - Cramer on VICEX - Stock Picks)Vice fund, which specializes in sin stocks. "But that has long since burnt off, and it's time to revert to the mean."

Ahrens suggests investors forget the small guys in favor of mega-caps whose share prices barely budged in 2004. He likes Anheuser-Busch (BUD Quote - Cramer on BUD - Stock Picks) and Microsoft, the latter of which stood still in part because of this month's mammoth $3-a-share dividend payout.

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