One of the few upsides of the Nasdaq's 
collapse is that it helps us separate the winners from the losers in the tech-heavy mid-cap growth fund crop. Today, we'll show you one from each pile.
On average, these funds rode fat tech bets to a 63% gain in 1999, lapping the S&P 500
three times, according to Chicago fund-tracker Morningstar. They've also ridden tech down, losing a quarter of their value, on average, over the past 12 months.
Despite their recent rough ride, it's easy to see why you might be looking for a solid mid-cap growth fund. After all, they make up at least 10% or 15% of a diversified portfolio if we use the broad Wilshire 5000 Total Market Index as a yardstick. And their penchant for posting big gains can give your portfolio a boost when the wind presses at their backs. Problem is, finding a good one isn't easy. Scads of funds looked great on the way up in 1999, and more than 90% are underwater so far this year.
Rest assured, we've found a can't-miss and a must-miss in the category. We're adding the no-load
(BRAGX Quote - Cramer on BRAGX - Stock Picks)Bridgeway Aggressive Growth fund to our Ima Winner Fund Club. Meanwhile, the winded, broker-sold
(POEGX Quote - Cramer on POEGX - Stock Picks)Putnam OTC & Emerging Growth fund joins its sibling
(PNOPX Quote - Cramer on PNOPX - Stock Picks)Putnam New Opportunities fund in our Ima Loser Fund Club. I own both of these losers.
The Winner
John Montgomery is a numbers guy, and his Bridgeway Aggressive Growth fund's numbers are pretty solid.
The fund topped the S&P 500 and 99% of its peers over the past three and five years, according to Morningstar. But it's not just a one-hit wonder: The fund has beaten its average peer in each of the past five years and is doing so again in 2001.
Ima Winner
Bridgeway Aggressive Growth's strong showing |
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| Source: Morningstar. Returns through Aug. 13. |
Montgomery, a former research engineer at MIT who founded Bridgeway Funds in 1993, uses quantitative models to find his stock picks. Four screens sift the market, sizing up companies by their earnings growth, valuation and trading momentum. The math is complex, but the idea is to blend the cheap shares of undervalued companies with the pricier stocks of fast-growing shops. The resulting success is easy to appreciate.
And even though it has just $276 million in assets, about half the size of its average peer, the fund's 1.25% annual expense ratio is easily below the category's 1.54% average.
Of course, there are some caveats to keep in mind. Like many mid-cap funds, much of its money is actually invested in small-caps -- about 40% at the end of the first quarter -- so if you're looking for a pure mid-cap growth fund, you might have to look at the
(RPMGX Quote - Cramer on RPMGX - Stock Picks)T. Rowe Price Mid-Cap Growth fund. Also, Montgomery runs all of his firm's six funds, so he might be stretched a bit thin if they get popular.
But since he's following a numbers-driven strategy and not necessarily trotting around the globe, he can handle a little extra work. And the quality of that work makes this fund worth a long, hard look.
The Dud
If the goal of investing were to get your teeth punched out, the Putnam OTC & Emerging Growth fund would be a heavyweight champ.
Co-managers Steve Kirson and Michael Mufson, who've run the fund since 1996, focus on companies for which they project annual earnings growth of at least 20%. That high-growth approach can lead the pair to stuff the majority of the fund's money into tech stocks. As you might imagine, that hasn't worked well recently, but the fund has actually been sputtering during their watch.
It trailed the S&P 500 and at least 86% of its peers over the past one, three, five and 10 years, according to Morningstar. The fund has also trailed its average peer in four of five years since 1996, when Kirson and Mufson took the wheel. The fund's 42% loss since Jan. 1 trails 98% of its peers, making another lousy year appear rather likely.
Ima Loser
Many unhappy returns for Putnam OTC & Emerging Growth |
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| Source: Morningstar. Returns through Aug. 13. |
Compounding problems is the fund's massive $4.3 billion asset base, compared with $550 million for its average peer. That mountain of money makes it tough to build or cut positions quickly or cheaply in the illiquid small- and mid-cap market, meaning the fund can't exit a cratering pick in a hurry.
One thing you can say about the fund is that it will probably take off if small-cap tech stocks get well again. In 1999's tech-driven blowout rally, the fund did trounce its average peer with a 127% gain. That said, it beat Bridgeway by just 7 percentage points that year, but the severity of its recent losses have more than erased those gains. A $10,000 investment in the fund at the start of 1999 would've been worth $7,276.77 on June 30, according to Morningstar. The same investment in the Bridgeway fund would've grown to $24,192.66.
If anyone can appreciate this fund's pain, it's me. I bought shares when I worked at Putnam for a year or so in the mid-1990s. Given its size, there are plenty of folks out there who've taken a beating alongside me. I suggest we scoop up our teeth and leave.
Ian McDonald
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