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Tiny Fund Is Reserved in Name Only

Now that the insurers of Who Wants to Be a Millionaire? are complaining that the questions are too easy, here's one that isn't:

How could you have scored a 160% gain on your money in the past 12 months?

  • Van NetNet Tech-Tech Aggressive Growth Highflier Fund
  • Reserve Informed Investors Growth
  • Marrying a millionaire

Final answer?

Of course you've never heard of it -- even though this little-known large-cap growth fund has posted huge returns, pushing it to the top of the charts. (RIGAX)Reserve Informed Investors Growth is teeny-tiny -- just $10 million in assets.

Plus, its adviser (also not likely on your radar screen, Reserve Management) does absolutely no marketing.

But the numbers by themselves would make quite an ad. It has beaten the S&P 500 index by more than 150 points over the past year, and even in this year's can't-make-up-its-mind market, it's up 25% in less than two months. Long-term returns ain't shabby either. Reserve is one of the top performers, even in the glowing growth category. For the past three years, according to Morningstar, it delivered 60% a year on average; in the last five years, it's up an average of more than 40% annually.

No secret stock-picking style here -- but one that certainly isn't conventional. Manager Tom Fitzgerald, whose firm was founded more than 40 years ago and manages some $350 million, says he has a "total disdain for Wall Street research."

No buy or sell signals from analysts -- traditional tools for many investors -- for Fitzgerald. "We prefer to be on the side of people running companies, instead of people running money." That means going with stocks of companies that back up their beliefs with bucks. "It is far more prudent to invest in stocks which some of the nation's more knowledgeable investors own or are buying with their own money, rather than to chase fad or glamour stocks masquerading as disciplines," says the fund's prospectus.

A number of signals, gleaned from countless Securities and Exchange Commission filings, tell Fitzgerald that executives -- or "informed investors" as he calls them -- are putting their money where their mouths are:

  • Officers are buying shares on the open market.

  • A big outside investor posts a 13-D disclosure, which shows the purchase of at least 5% of the company's stock.

  • At least one-fifth of the stock is owned by managers and directors.

  • A company announces it will buy stock on the open market.

Once a stock fulfills one or all of those criteria, Fitzgerald figures he has a leg up on the competition, but that's not the end of the story. Next, he puts it through a test of fundamentals, searching for sustainable earnings trends.

That put him right in the market's sweet spot last year. But a couple of very well-timed moves helped. He sold down a lot of highfliers in the seemingly nonstop rally in December. He had 50% of the fund in cash -- taking profits on stocks such as Yahoo! (YHOO) (off 23% this year).

"We saw the run-up as a clear warning and were mindful of Wall Street's tendency to be overenthusiastic and then redress come the New Year," says Fitzgerald. He also got out of America Online (AOL) the minute it announced plans to merge with Time Warner (TWX). AOL chief executive officer "Steve Case backed into a buzzsaw with that group. ... Backstabbing is the way things are run," he says with characteristic candor.

Where has that led him in today's stir on the Street? Fitzgerald is heavily concentrated in fiber optics and biotechs. Both are sectors he bought into before their big runs. JDS Uniphase (JDSU) is the fund's largest position. Other names include Sycamore Networks (SCMR) and Ciena (CIEN). "These are our stocks -- fiber optics is the area we want to emphasize."

He sees retailers and drugs as areas to avoid. But he feels the same stodginess in drug stocks will fuel growth in biotech. "A number of major drug companies have patent expirations, and they will have to turn to biotech companies to replenish the pipelines." Fitzgerald also has little room for so-called "value" stocks such as International Paper (IP), which he feels will suffer in an environment of rising interest rates.

There are a couple of red flags to Reserve Informed Investor Growth: Although 1999 was a banner year, and its long-term numbers are impressive, to say its turnover is high would be quite an understatement. It was 410% last year. And it is much more volatile than many of its peers. It ranked dead last in its category in 1996 when it returned just 1%, and it was near the bottom quarter of the category for the following two years.

If you can't handle that, Fitzgerald doesn't want you -- he's got the same disdain for investors who worry too much about risk as he has for Wall Street analysts. "If you want an investment with the EKG of a dead person, buy Treasury bills," he advises.


Help me out, here. What's the worst "conventional wisdom" about getting started and investing in mutual funds that you've ever heard? I've got a long list, but want to hear from you, too.

Brenda Buttner's column, Under the Hood, appears Thursdays. At time of publication, Buttner held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While she cannot provide investment advice or recommendations, Buttner appreciates your feedback at TSCBrenda@aol.com.

As originally published, this story contained an error. Please see our Corrections and Clarifications for details.

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