BW Online | December 21, 2000 | Outsourcing Bets Pay off for These Managers

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DECEMBER 21, 2000

FUND Q&A � From S&P

Outsourcing Bets Pay off for These Managers
The managers of William Blair Small Cap Growth have hit paydirt with outsourcing plays -- particularly in business services and contract manufacturing. Here are the stocks they like now

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Mark Fuller and Mike Balkin, managers of William Blair Small Cap Growth/A (WBSAX ) pick stocks mostly one by one, including IPOs, but they've also been betting on a broad theme of outsourcing, particularly in business services and contract manufacturing.

This strategy has helped cushion the fund from this year's tech meltdown that walloped many other small-cap growth portfolios. This year through November, the fund rose 27.4%, versus a drop of 15.6% for its peers. The fund is too new to be ranked by Standard & Poor's. Other key points:

--Business service picks include FirstService Corp (Vtg) (FSRV)

--Contract manufacturing plays include Pemstar Inc (PMTR) and TTM Technologies (TTMI)

--Largest holdings include Ameripath Inc (PATH), Steiner Leisure (STNR), and Avocent Corp (AVCT)

Standard & Poor's recently spoke with co-managers Mark Fuller and Mike Balkin about the fund's investing approach -- and the stocks it likes now.

Q: What are the main features of your investment process?

FULLER: We are growth investors who focus on valuations. If available, we'll look at the valuation history of a potential holding. We consider the forces driving momentum investing, since it's the most popular type of growth investing, but we stress valuations. We're primarily bottom-up, fundamental investors, though we look at such top-down indicators as interest rates, GDP trends, and sector weightings. Some company-specific criteria include growth rates, profit trends, and leverage. We don't make investment decisions based on technical considerations, though they may affect the timing of purchases and sales on the margins.

Q: How does being small-cap investors figure in your research?

FULLER: Management is especially important in the small-cap market place.

Q: What's your sell discipline?

FULLER: We'll sell if a company gets too big, fundamentals weaken, or valuations get too high.

Q: What investment strategies have you followed this year?

FULLER: We were very aggressive in the first quarter, but we didn't wait long to reduce our technology weighting in the second quarter. Since then, we've gradually moved to less risky and more non-tech companies, particularly in health care, consumer products, and energy.

Q: What are the fund's largest sectors?

FULLER: Our largest sector is the consumer discretionary area -- including business services -- and financial services. We trimmed our financial services and health care holdings during their recent highs.

Q: What's behind the business service plays?

FULLER: It's a promising area because the U.S. is moving from a manufacturing economy to a service economy. In a service economy, outsourcing becomes very important in such areas as payroll services, credit card processing, and human resources.

BALKIN: One business service pick we like is FirstService Corp (Vtg) (FSRV ), which provides management services for residential properties and condominium associations. FirstService should gain from its predictable earnings growth.

Q: What's your approach to technology?

FULLER: In technology, we are stressing companies with reasonable valuations over the next one to two years. We avoid technology companies without profits or reasonable earnings. We've found some interesting tech plays in contract manufacturing, including Pemstar Inc (PMTR ), and TTM Technologies (TTMI ). Since numerous technology companies outsource their manufacturing operations, many contractors have used economies of scale to drive attractive returns. We expect this trend to continue.

Q: What factors do you think were critical to the fund's performance this year?

FULLER: Our focus on valuations helped in March, when market dynamics began to change. We've also been willing to sell some stocks and then buy them back. Our small size has helped us with IPOs, which we sold when they got to unsustainable levels. Through the third quarter of this year, more than half of our returns came from stocks that went public earlier in the year.

Q: What are the fund's largest holdings?

FULLER: FirstService, Ameripath Inc (PATH ), Steiner Leisure (STNR ), Avocent Corp (AVCT ), and StarTek Inc (SRT ).