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TheStreet Open House

Funds Notebook: PBHG Fund Returning 800%, Turning Away New Investors

If you want proof that PBHG's aggressive investment style suits this market, just look at (PBNOX) PBHG New Opportunities . It's a small fund, closed to new investors, that's up a staggering 830% over the past year.

How has 27-year-old portfolio manager Frank "Quint" Slattery posted such a fat return, and is there any way you can get a piece of the action? All will be revealed.

The $261 million fund, which closed last fall, had about 90% of its assets in tech stocks like top holdings InfoSpace.com (INSP) and JDS Uniphase (JDSU) at the end of 1999. Year to date, these stocks are up 143% and 74%, respectively.

The fund holds about 40 to 50 stocks and trades quite actively with about 25% of the fund's assets, according to Michael Gaul, a Morningstar analyst who covers the fund. The portfolio's turnover rate -- the percentage of the portfolio that has changed in the past year -- is over 600%, says Gaul. The average domestic stock fund's turnover rate is about 89%.

If that type of aggressive approach appeals to you, consider Slattery's other fund, (PBHEX) PBHG Select Equity , which is still open to new investors.

But Select, up 363% over the past year, isn't a New Opportunities II. It's a bit more focused, holding 30 stocks. Its goal is to hold the firm's small- and mid-cap favorites, and its turnover is typically much lower than New Opportunities'.

Although Slattery only took the reins in November, there's significant overlap between his two funds. At year-end, the funds' top 10 holdings had nine stocks in common, and all but six of Select's top 25 holdings were in New Opportunities' top 25.

There's a good chance the style's at its peak -- after all, the shop's average domestic growth fund is up 264% over the past year. Led by high-profile manager Gary Pilgrim, PBHG primarily takes an aggressive approach to risky small- and mid-cap growth stocks, and when those stocks get a cold, these funds can get pneumonia.

For example, from the end of 1995 to the end of 1998, the firm's flagship, (PBHGX) PBHG Growth , struggled to stay in the black and trailed more than 80% of its mid-cap growth peers. But with its style back in favor, the firm is clearly on the rebound , and investors are noticing -- last quarter was the first since 1997 in which more investment flowed into the firm than was taken out, according to Boston fund consultant Financial Research.

A spokesman urges investors to see the funds as a long-term investment and recognize their feast-or-famine style, since dark days will inevitably come again. At times, investors' relationship with the tumultuous funds can be as extreme as the fund's performance.

At a conference held while they were out of style, an investment adviser, voicing his displeasure, said, "I'm not going to wear the knees out of any more suits praying for Gary Pilgrim."

Wonder what he's saying today?

Film at 11

The folks at the (WWWFX) Internet fund have launched a television ad campaign touting the fund's stellar long-term record, but you should probably take a look at the fund's more recent performance to get the whole story.

Over the past three years, the fund has posted a remarkable 140% average annual return, according to Morningstar. Not surprisingly, it's that type of stunning longer-term return that makes good television. After all, it beats 99% of other technology funds. Unfortunately, the fund's tech peers have smoked it since high-profile manager Ryan Jacob left last June.

"Looking at those numbers is a bit misleading. A lot of the fund's performance came under Ryan Jacob's management and he's gone," says Chris Traulsen, a Morningstar analyst who covers the fund.

The fund is up 146% over the past year and 14.7% since Jan. 1. That sounds good but the fund lags 77% of its tech-fund peers over the past year and almost 90% so far in 2000. Jacob's own dot-com-heavy fund trails the Internet fund, but things have still gone downhill since his departure.

In the first half of 1999, the Internet fund went up 113%, compared with 34% for the average tech fund. Following Jacob's departure, from July through the end of the year, the fund rose 48.5%, while the average tech fund went up nearly 80%, according to Morningstar.

The fund's new managers, Peter Doyle and Steven Tuen, have reduced its risk, broadening the portfolio beyond dot-coms to include more telecommunications and infrastructure stocks, like Telephone & Data Systems (TDS).

Their more conservative approach could work out, but the managers' lack of experience still makes the fund a risky bet, says Traulsen. So, with so many Internet funds sporting solid records, which should you consider?

Take a look at offerings from managers with more experience, Traulsen says. His top three picks: (RIAFX) RS Internet Age , co-managed by Morningstar Manager of the Year Jim Callinan; (EIFAX) Enterprise Internet , run by veteran growth investor David Alger; and Firsthand E-Commerce, run by tech specialist and CNBC darling Kevin Landis.

FYI

  • Last year's triple-digit bonanza just keeps going. At the end of 1999, we gushed over the fact that more than 160 funds posted a return of more than 100%. Well, this year could be even more of a blowout. Through last Thursday more than 400 funds are up more than 100% over the past year, according to Lipper.

  • If your AG Edwards broker doesn't usually pitch MFS funds and just did for your IRA or individual retirement account, you might want to probe a little deeper.

    Through April 28, MFS is offering AG Edwards an extra large commission on sales of its funds in IRA accounts. AG Edwards will get to keep the full, 5.75% sales charge investors pay on Class A shares of equity funds (4.75% on bond funds). Usually, MFS keeps 0.75% of the charge for itself. AG Edwards also will pocket an extra 0.5% on sales of class B shares.

    It's a little-known, but fairly common promotional technique called reallowance , and the upshot is that a fund company pays a brokerage more than usual for selling its funds. Implicit in the deal is that the brokerage will share some or all of the boosted payouts with the brokers who sell the fund to you.

    TSC has previously reported on PaineWebber's (PWJ) use of reallowance to raise a whopping $2.1 billion for its Strategy fund and an IRA promotion similar to MFS' offered by Kemper Funds.

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