Mid-cap funds can offer nice potential with less risk

Even though the Dow Jones industrial average and the S&P; 500 index have staged strong rallies during recent months, large-cap stocks' ascent hasn't matched small caps' surge. Through Aug. 6, the S&P; SmallCap 600 is ahead 13.8 percent, nearly 4 percentage points more than the S&P; 500. The Dow Jones US Small-Cap is ahead by even more.

But small caps can be the most volatile type of stocks to own. If you want to delve below the biggest names but not go all the way down to the tiny, mid-cap funds can fit the bill. (Not surprisingly, the mid-cap indexes have posted gains this year that fall right in between those of small- and large-cap indexes.) In fact, the mid-cap categories are home to many original thinkers who have found success by following their own minds.


To see our fund analyst picks in the three mid-cap categories, look here. But other choices outside those lists also bear watching.

ABN AMRO Mid Cap (CHTTX): This offering falls in the mid-blend category, but don't think of it as bland. Manager Thyra Zerhusen isn't afraid to make bold bets. She often plunks a substantial amount of assets in one or two sectors she feels most optimistic about, and if that's the risky technology area, so be it. In the past few years, in fact, tech is exactly the area she has favored. Hardware stocks in particular have caught her fancy: At the end of June, she had 22 percent of assets stashed in that subsector - three times the category average. The fund's 23 percent media stake was four times the norm.


Zerhusen's daring approach makes this fund inappropriate for more conservative investors, but her results have been impressive. The fund posted solid gains in 2000 and 2001 when the market was falling, and though 2002 was less happy, the fund is again topping most of its peers so far in 2003. In fact, through Aug. 6, its 19.9 percent gain put it in the top of its category, as Zerhusen has been handsomely rewarded for sticking with some of the picks that caused the fund pain in 2002.

Hotchkis & Wiley Mid-Cap Value (HWMIX): Lead manager Stan Majcher, relying on a large team of analysts and portfolio managers, isn't afraid to put this mid-value fund's money into controversial stocks. He and his team look for companies whose share prices don't reflect their earnings potential under what the team considers normal conditions. That process often leads them to stocks that have had their prices beaten down by scandals or business woes. Recently, for example, he invested in beleaguered Tenet Healthcare (THC). If a company pays a high dividend, so much the better.

More often than not, Majcher and his team have come out ahead with this admittedly risky approach. Sears (S) and Computer Associates (CA) are examples of stocks where the fund's willingness to buck conventional wisdom has paid off. The results speak for themselves: The fund has the second-best trailing five-year return in the category.

So far this year, it is No. 1. That actually provides a reason to add a note of caution: Be aware not only of the risks of its strategy - inevitably, some restructuring plays fail to recover - but that it's not likely to be the absolute No. 1 too often. But with those factors in mind, it's well worth a look.

Fidelity Mid-Cap Stock (FMCSX): This is a big fund, but it's not a conformist. Before taking the reins here, manager Beso Sikharulidze managed Fidelity Convertible Securities (FCVSX), among other offerings, and that heritage shows in this fund's portfolio. Unlike almost all other mid-cap growth funds, this one owns a chunk of convertible bonds. While those aren't as staid as conventional bonds, they still tend to provide a cushion when stocks fall. Also helping reduce the volatility here - despite its growth leanings - is the fact that assets are spread over more than 400 issues, with none getting even 1.5 percent of assets. (Its typical peer has about 100 holdings.) In other words, a mistake on one or two companies won't sink the fund.

Lately, the fund's convertible-bond stake hasn't been a boon, as a strong stock market rally has given all-stock funds an advantage. But wary investors might appreciate the fact that this fund's makeup should keep its performance more moderate than average for the category, while Fidelity's stock- (and bond-) picking skills give it an edge.

One caveat: Given the turnover among Fidelity's managers, one can't be too sure Sikharulidze will be running this fund for a long time (he's the fourth manager here since the fund's 1994 inception).

Knight Ridder/Tribune Information Services.