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This Mutual Fund Can Open the IPO Door for You USAA Aggressive Growth is a high-risk, high-return (lately, anyway) fund that grabs new offerings before they get hyped Did you ever wish that you had gotten in on some of this year's hottest new issues -- companies such as United Parcel Service, Sycamore Networks, and Akamai Technologies? Most individual investors have little opportunity to buy hot IPOs at the offering price, since underwriters allocate those precious shares mainly to institutions. But if you owned USAA Aggressive Growth (USAUX), you could have gotten a piece of those IPOs -- and many more. As part of its broad strategy to invest in the fastest growing companies, portfolio managers Eric Efron and John Cabell like to buy into up-and-coming companies as early as possible and ride them as their market cap grows. Several companies purchased at the offering price years ago, such as Network Solutions and broadband play Metromedia Fiber Network, are now among the fund's the top holdings and biggest winners. More than just getting the pop in share price that often comes the first day of trading, managers say they benefit from choosing among the latest crop of companies before Wall Street research analysts have written reports telling other investors to buy in (Analysts from firms that helped bring a company public are required to wait 25 days after the IPO to publish research.) STEADY SUPPLY. "We get a little bit of a jump on the Street," says Cabell. "Analysts aren't out there banging the pots and pans yet." Both are former analysts with about 20 years each of investing experience and do their own fundamental research when choosing new issues. Efron sees a steady supply of new IPOs into next year and expects some high-quality companies to come public in 2000. Tracking new deals also helps the fund managers come up with new ideas. "IPOs are windows into what's going on in the world," says Cabell. USAA Aggressive Growth isn't an IPO fund, however. It has nearly 250 stock holdings, and less than 20% of the portfolio are companies that have been public for less than six months. The hot IPO market has certainly helped fuel returns -- the fund is up 62% this year through Dec. 3. But an emphasis on technology stocks, which make up 42% of the $1.3 billion fund, hasn't hurt either. Health care, which accounts for 18% of the fund's assets, has also been a positive. Cabell, who handles that sector, has avoided troubled areas such as HMOs and nursing homes and emphasized biotech. (Efron covers the technology, telecom, media, and business-services sectors, while Cabell handles health care, retailing, and financials.) The high-risk fund hasn't always performed so well. From about mid-1996 through 1997, its returns suffered as small-caps fell out of favor and the market narrowed to reward only the largest companies. Efron and Cabell realized that some of the fastest growing companies were large-caps and broadened out the portfolio, which now includes mega-caps such as Dell Computer, Microsoft, Cisco Systems, and Intel. In 1998, returns turned up. Today, most stocks in the fund are in the small- to mid-cap range, but "we use all of our dance floor," says Cabell. "There are some elephants that can dance." "WE SUFFER MORE." The fund's diversification across industries and market caps shields investors somewhat from damage caused by a stock or industry that implodes, or from shifts in the market to favor only the largest or smallest companies. However, USAA Aggressive Growth is confined to one investment style. If interest rates rise and the market stops favoring fast-growth, high p-e stocks, the fund will take it on the chin. With a beta (a measure of risk) of 1.32, its returns are about 30% more volatile than the S&P 500. "When the market has a downturn, we suffer more than many," says Cabell. Still, for investors who want to allocate a portion of their assets to a high-risk, high-return strategy, the fund boasts a low expense ratio of just 0.72 (many of its aggressive-growth peers charge 2% or more a year). For that you get two experienced managers, a broad crop of high-growth stocks, and access to IPOs. So even though USAA Aggressive Growth owns plenty of high-priced stocks, in many ways it looks like a good buy. Stone is an associate editor at Business Week Online _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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