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For fund managers who weren't out-and-out technophiles, the past few years haven't been easy ones. But even with his tempered approach to technology (looking for earnings and profits), Robert Gardiner's

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Micro Cap fund has been a top performer since its inception, ranking in the top 3% over the past five years. Over the past year, it's in the No. 1 spot in its category. (The fund was closed to new investors in March.)


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Small Cap Value -- which Gardiner calls a "busted growth" fund -- stands at the top of the charts as it approaches its third birthday in December. It ranks in the top 3% of its category over the past year.


Meet the Family Q&A, Gardiner elaborates on bottoms-up stock picking and describes his "picks and shovels" approach to pricey growth plays. (Check out our Meet the Family feature on

Wasatch Funds.)

TSC: You head up both a value Small Cap Value and a growth Micro Cap fund. Do you find it hard to switch back and forth between those mentalities?


Our value product is not like traditional value products.

Small Cap Value focuses on what we call fallen angels.

We'd see stocks get slaughtered by momentum investors when they missed earnings by a penny. We want to own companies like that, which we think can be growth companies again. Probably our biggest victory is, back in the Asian crisis, you couldn't get anybody to own a small-cap tech stock. So we picked up incredible companies that had hit a bump in the road because their Asian business was soft, like


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We're not investing based on the balance sheet, though most traditional value funds might be focused on the balance sheets. We're focused on what the income statement could become, can a company get growing again.

TSC: I noticed you've had some pretty big cash stakes recently -- Micro Cap had about 17% and Small Cap Value around 11% at the end of the third quarter. Why?


Well, first of all, I have zero interest in timing the market. The cash stake is not because I think the market's going down. It's more a function of a unique environment this year. If you look at the top 10 names at the beginning of the year, they'd almost all had a huge run over the last couple of years. Really a lot of core holdings I'd owned for years got expensive, so I took a lot of cash off the table. So I was selling a lot of big holdings, creating a lot of cash that way.

Though I added new names, they were mostly small positions. One thing I like to do is due diligence. I generally buy small positions and get to know the companies. Then I add to them over time. The cash position in Micro Cap is down to 11% or 12% now, and Small Cap's at about 7%. I see no shortage of interesting ideas; I'd love to be at 2% cash.

But I try not to pressure myself to have a low amount of cash.

One last factor that's been pretty meaningful to Micro Cap is that there have been three or four takeovers of our large holdings, most recently

Active Voice


being taken over by


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. Another one was

Wilmar Industries

, a distributor of plumbing and heating products. And

Carey International

, a limousine company.

So, boom, you get a bunch of cash you're not expecting to get. But the key point is, I'm not trying to time the market.

TSC: You have some pretty big holdings in health care -- 27.5% in Micro Cap and 24.2% in Small Cap Value, as of Sept. 30. Why do you like that sector?


It wasn't like we woke up and said, oh, health care is where it's at. It's much more that we were looking for great companies and found a lot in health care. So the bottoms-up stuff took us there. Also it's driven a lot by demographics, with a lot of new technology coming down that way.

We haven't been very big in biotech, by the way, and it's been weakening over the last couple of weeks.

Some of these stocks have similar profiles to dot-coms. Though we'd be more interested in biotech, because there's a sustainable advantage there. Typically we try to buy companies that are back-door plays on biotech.

Instead of investing in the biotech industry, we've invested in the companies that sell the picks and shovels to the biotech industry. In Micro Cap, some genomics stocks did well, like


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. At a point a couple of years ago, Techne was the large holding in Micro Cap. We've also owned a company called

Myriad Genetics

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, which isn't making money. That's pretty rare for us.



is another big holding in Micro Cap. It's the largest surgery center company. It's growing 40% to 50%, but the market hated health care services stocks, so its P/E got down to 8 or 9. The stock's more than doubled since then, from around $5 to $14.

Another holding is

ICU Medical

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. They make the products that go into IV tubing sets, to create a needleless environment.

TSC: What are some other names you like going forward?


I'll give you some growth names. A long-term holding is

Pericom Semiconductor


. They make interface semiconductor products and have had fantastic results. But the stock's been creamed with the whole semiconductor area. It's as cheap as it's been in years. The long-run outlook is pretty good.

And I like a teeny IT services company called

PEC Solutions

( PECS). It's been creamed, too; a lot of Internet IT services companies missed their numbers. But PEC is 100% focused on the government market, Web-enabling the government. We think that business is really accelerating. The interesting thing is, there are a lot of barriers to entry. A huge number of PEC's employees have security clearances. They came public this year, and, unlike most

IPOs, they had made money for years. They're growing about 40% to 50% a year, and executives own about 80% of the company.

TSC: When do you decide to sell?


We don't sit here and focus on consultants telling us, oh, the

market cap is too big. I still own today a name I bought five years ago,

Micrel Semiconductor


, at a $200 million market cap. Today its market cap is $2.3 billion, and I still own a small position. Our median market cap is $250 million or so.

But my point is, if I find a great company, I'd like to get 50-bagger. So if I think it's still going up, why would I sell it?