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Bottom-Dwelling Managers Offer No Excuses, Just Promises of Improvement

A look at some funds that rank dead last among their peers.

Any

Arizona Diamondbacks

fan knows that when you're in last place, you sometimes gotta change the team and tactics if you want a turnaround.

Sports aren't stocks, but a choppy market is often prime time for fund firms to pitch managers or swap styles in poor performers. So there's no question it's worth watching the cellar dwellers these days.

But you can't focus simply on the overall worst-performing funds. Usually, one style or sector dominates that list (as Internet funds have in the past month), and it's tough to tell if a fund landed there because the category is out of favor or because it's just a bad fund. I prefer to look at ones that are dead last among their peers. After all, relative underperformers can't offer the standard line, "It's not me -- it's my sector."

I talked with several managers whose funds are members of the "Century Club" for 1999. (They rank at the bottom -- the 100th percentile in their category, according to

Morningstar

.) Granted, I'm the first to admit you shouldn't judge a fund based on six-month returns, but these days investors are proving they have little patience for even short-term cellar dwellers. Which means management will likely be quicker to jump as well.

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Fairport Midwest Growth, down 14% so far this year, is changing managers and switching strategy, with plans to take on a new name and philosophy later this summer.

John Karnuta, who replaced Norman Klopp as manager as of March 1, is ready to fill the mid-cap blend fund with technology and health care stocks, which it tended to steer clear of in the past. "It was more oriented to industrial America. I have a broader outlook," says the former investment manager with

BP America

. "The difference between me and before is I have a very disciplined way of picking stocks based on relative profitability and relative valuations."

Karnuta expects more dramatic change in a few months, when Fairport Midwest abandons the fund's name and mission, which currently requires it to keep nearly two-thirds of its assets in Midwest-based companies.

The numbers better change as well, he acknowledges. Although the fund beat the

S&P 500

two of the past five years, it ranks in the bottom 10% of its category for the trailing one-, three- and five-year time periods. Shareholders are certainly taking notice. Fairport Midwest lost more than a quarter of its assets in 1999 alone, and is now down to about $45 million.

Outflows are even worse at

(SCHVX)

Strong Schafer Value. Assets shrunk by half in the past year to $1 billion. But that's all veteran manager David Schafer says will change, even though his longtime value fund is down 7% so far this year and gave up 7% in 1998.

When asked what mistakes he made, Schafer smiles and says, "Ask about my successes -- that's a shorter list." Top holding

Cadence Design Systems

(CDN)

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fell nearly 60% so far this year on news that profit and revenue growth will slow. Schafer also had another big position in

Omnicare

(OCR)

, which lost nearly 50%.

But he's one of the most disciplined value managers around -- the fund's average price-earnings multiple is 12 -- and has no plans to veer from that style. "The one thing we pride ourselves on is our discipline; we stick with the approach," he says.

Yet recent losses have taken their toll, even on a long-term record that was once the envy of Schafer's competitors. One-, three- and five-year average annual returns are in the bottom quarter of the mid-cap value category. "It's been really painful," he says. "We've dug quite a hole for ourselves."

Todd Sheridan, manager of

(PSMCX) - Get Principal SmallCap C Report

Preferred Small Cap, knows how that feels. He went from a ranking in the top third of his peers last year to the 100th percentile in 1999. The fund is off 12% since January.

"We held the right stocks last year, and didn't this year," Sheridan says wryly. Some holdings taking big hits:

Stewart Info Services

(STC) - Get Stewart Information Services Corporation Report

, which lost some 40% in value, and

D.R. Horton

(DHI) - Get D.R. Horton, Inc. Report

, down better than 30%. But Sheridan says he has no plans to tinker with his approach of choosing stocks with increasing consensus estimates that trade at attractive valuations. "We're sticking with our guns, for now. It appears the worst is over."

Ted Price doesn't deny it's been a rough 1999: "It's no fun." Not for shareholders of his

(MGAAX)

Mentor Growth fund, either. On top of a mediocre 1998 (eking out just 2%), Mentor Growth has lost better than 10% so far this year. Price isn't sure what hit him. Literally.

"It baffles me," he says. "I can tell you we've done badly, but I can't tell you why we did badly." But net redemptions have been minimal for the $500 million fund. And the manager, who started the fund under a different name nearly 15 years ago, sees little reason to change.

Investors at all these funds may not be so forgiving if numbers don't pick up soon. Don't worry, says Fairport's Karnuta. "We'll beat our peers."

Well, as it's said, there's nowhere to go but up.

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.