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Buy Small-Caps With an Edge, Virtus Says

Small-cap companies that can weather any economy are the best bets.

LOS ANGELES (TheStreet) -- Tempur-Pedic (TPX) - Get Report and Pool Corp. (POOL) - Get Report are sustainable, strong small-cap companies that can thrive in downturns, says Jon Christensen, who helps manage the Virtus Small-Cap Core Fund (PKSAX) - Get Report.

The mutual fund has returned 2.9% this year, compared with 0.8% for its peer group. The Virtus Small-Cap Core Fund has risen 32% over the past year compared with 26% for its rivals.

Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

What's the best type of small cap to own now?

Christensen:

The right type of small cap to own any time is a high-quality business. And what I mean by that is a business that has a sustainable, competitive advantage over long periods of time, whether that's through a brand, low-cost scale advantage, niche dominance or network infrastructure.

It hasn't been easy for the mattress makers, but you like Tempur-Pedic.

Christensen:

Tempur-Pedic has one of the strongest brands in the mattress industry. At a time when the mattress industry was experiencing unprecedented sales declines, Tempur-Pedic kept its pricing solid and remained profitable, while the other companies, the three S's --

Sealy

(ZZ)

,

Serta

TheStreet Recommends

and

Simmons

-- were losing money or going into bankruptcy.

Another stock you like is Pool Corp.

Christensen:

Pool Corp. is the United States' largest pool distributor. What we like about them is they aren't reliant on the new-pool construction market. Over 50% of their revenues are driven by the maintenance of existing pools. During the market downturn, they were actually able to take out a lot of the mom-and-pops due to their large volume buying. Therefore, they could pass on their lower costs to their customers, which the mom-and-pops could not do.

You're a big fan of Blackbaud (BLKB) - Get Report, which supplies software services to nonprofits.

Christensen:

If you think about charitable organizations, they want to focus on building their brand, having events and raising money. Blackbaud provides effective services to do that and they do it very well. They have a product called the Raiser's Edge, which allows these businesses to more effectively raise money and keep track of where the money's going. In the end, more money goes to the charity and less to overhead.

Why are you bullish on Federated Investors (FII) - Get Report?

Christensen:

Federated is a great company with a great scale cost advantage. Federated is a pioneer in the money market industry, and they are able to incrementally raise assets while the incremental costs to administer those assets is very miniscule. So it's a very nice scale business that we like right now during these volatile markets.

-- Reported by Gregg Greenberg in New York.

Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.