Kaufmann Fund crows, stays on course

MUTUAL FUNDS

September 24, 1995|By NEW YORK TIMES NEWS SERVICE

Though mutual fund advertising has generally faded this year, one fund seems ubiquitous -- the Kaufmann Fund.

Kaufmann has good reason to plaster its performance all over train stations and newspapers. It has gained nearly 37 percent so far in 1995, ahead of the average for all aggressive growth funds.

Even more impressive was its 9 percent return last year, when its peers lost 2 percent. And if you go back to the fund's rebirth in 1986, Kaufmann has topped its group by nearly four percentage points a year on average.

At $2.3 billion, the fund has doubled in a year. And it's becoming too big for a fund that specializes in small-capitalization stocks, says Craig Litman, co-editor of the No-Load Fund Analyst in Orinda, Calif. "When a fund gets that big, it's tougher to perform," he said.

That's not all Kaufmann's critics quibble about. There's the fund's high-risk approach to investing, its sky-high expenses, its two-man operation.

Lawrence Auriana, who co-manages the fund with Hans Utsch, dismisses all those concerns. Still, investors who want to get in on Kaufmann's red-hot performance will find some unusual elements lurking in its portfolio and in its past.

Mr. Auriana does not consider growth an impediment, but that opinion puts him at odds with more than a dozen managers of small-cap funds that have slammed their doors in recent years at far lower levels than Kaufmann's. Those managers opted to remain nimble at moving in and out of small-cap stocks.

Diversity is definitely not a problem. The number of stocks in its portfolio has climbed steadily, to about 350 from just 60 in 1990, Mr. Auriana said.

But the median market capitalization of its stocks has drifted up in the same period, to more than $500 million from $175 million. So, the very small companies that distinguished the fund no longer comprise the core of its portfolio.

Roughly 25 percent of the portfolio is devoted to companies in which it owns more than 5 percent of the stock. With such significant stakes, Kaufmann could have trouble liquidating those shares without punishing prices. "I don't think that's a problem particular to us," Mr. Auriana said.

Mr. Auriana, 52, and Mr. Utsch, 59, took over the fund in 1986 after it had dwindled to a few thousand dollars under its original manager, J.W. Kaufmann. After an abysmal start, their boutique fund thrived.

They look for dazzlers, stocks whose earnings will grow at least 20 percent annually over three to five years. To find them, they meet with the management of four to eight companies every day.

A few years ago, it was more like two to four companies a day.

Right now, they're buying the Borders Group, a big operator of book superstores that went public in May at $14.50 and traded recently at $19.625; Department 56, the leader in handcraft collectibles whose stock traded recently at $44.875; and Cheyenne Software, which makes software for local-area networks, trading recently at $19.50.

By market sector, the fund has a big bet on technology, at 30 percent of assets, though not in the Intels and IBMs of the market. Microchip Technology and Compuware were two of its biggest holdings in its year-end portfolio.

Also prominent are health care stocks, at 20 percent of assets, and retail companies and restaurants, at a combined 15 percent.

The managers began diversifying in 1991, when the market as a whole became less volatile but the volatility of individual stocks increased, Mr. Auriana said. That's also the year the fund's assets exploded and its overperformance came to an end. With the exception of 1994, the fund has remained within a couple of percentage points of its peers since 1992.

Scour the new-issues calendar and you'll turn up many of the fund's stocks. At least 80 percent of its holdings were bought as new issues, and that percentage has probably jumped in this year's frothy market, Mr. Auriana said.

Such companies can make investors into millionaires overnight, but they can also crumble when the market slumps.

Mr. Auriana says the fund does not play the slippery new-issues market for quick profits. But he acknowledges that these are not sleep-tight stocks.

"We're obviously more volatile than most funds, because more than two-thirds of our stocks are NASDAQ stocks," he said. "If we have a bear market, the fund will go down more than the market."

Could the fund decline 37 percent, as it did in 1987?

"We were a $3 million fund then, and much less diversified," Mr. Auriana said. "We've learned some valuable lessons in 1987 that helped us a lot last year."

One side effect of the fund's growth is that annual expenses have fallen, from a startlingly high 3.5 percent of assets to 2.2 percent for the first half of this year.

The biggest chunk of Kaufmann's expenses is the management fee, which is a hefty 1.5 percent. At the fund's current size, that fee amounts to $34 million a year. One year ago, it would have been $18 million.

Mr. Auriana is unapologetic. "That's what we decided to charge when we founded the fund, and we think that our shareholders get their money's worth," he said.

And he says the high expenses have kept growth in check by discouraging some people from investing. Of course, requiring a higher initial investment -- the minimum is now $1,500 -- could achieve similar results.

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