VALUE ADDED


A Second Look at a Promising Fund

Steven Goldberg

It's time to reassess FMI Focus fund. It's slimmed down to a more reasonable size, and its managers are pursuing more mid-cap stocks.



It has been a couple of years since I last recommended FMI Focus fund (FMIOX). Co-managers Rick Lane and Glenn Primack let too much cash flood into their fund, undermining my confidence. But I think it's time to reassess.

Even when I'm not excited about their fund, I always enjoy listening to Lane and Primack talk stocks. They are two of the most gifted stock pickers I've come across.

What's more, they're honest. Some fund managers won't tell a journalist about a stock until they're ready to sell it; they hope a positive write-up will boost the stock's price when they do sell. Not Lane and Primack. They always share their best stories.

In listening to them, it's clear how much they love what they're doing. They get a tremendous kick from ferreting out small and mid-size companies that the rest of the investment world hasn't discovered yet.

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Primack readily concedes that they blew it by not closing the fund before assets swelled to $1.5 billion in 2004. "We had no idea how fast assets would come into the fund," he says. Launched in late 1996, the fund sparkled through 2003: It ranked in the top 25% among its small-blend peers in five of those seven years.

As assets soared, performance nose-dived. Over the past three years, the fund has returned an annualized 20%, but that's worse than 90% of the funds in its category. Consequently, investors have fled the fund in droves.

Better times ahead?

My hunch: With assets now to a manageable $1 billion, it's time to buy FMI Focus again. Not only are assets down, but Lane and Primack are finding more values among mid-size companies these days -- rather than the small companies that had been their bread and butter. The weighted market capitalization of the fund is now about $3 billion -- firmly in mid-cap land. "The small cap area has gotten very speculative," Lane says. "It's really hard to find much value there. We're finding more things to do in mid caps." I agree that small caps have gotten frothy; I think the managers are making the right move.

Stock talk

The fun part with Lane and Primack is talking stocks. The pair have given me a fistful of great ideas over the years. But as always, research these names carefully before you invest.

Take a look at Dresser-Rand Group (DRC). It helps companies pump oil and gas out of the ground. Dresser is using a new technology that is 3% to 5% more efficient than that used by the competition, Primack says, a huge edge in today's market that gives the firm the power to raise prices. "They have a better mousetrap." Analysts, on average, estimate that Dresser will earn $1.53 per share next year, "but I think that's light," Primack says. At $1.53, the stock trades at 17 times earnings. And Primack says demand for Dresser's business will grow rapidly.

As human-resources matters become increasingly complex, more firms are outsourcing that business. Hewitt Associates (HEW) is a leader in the field. Historically a pension-fund consultant, Hewitt now manages payrolls and benefits and provides administrative services, mainly to large companies. Initially, Lane says, Hewitt (along with competitor Fidelity) priced its services too low "and got creamed." Now the company has figured out the business, he says, but it'll take time for earnings to rise. The company is expected to earn $1.52 per share next year -- giving the stock a price-earnings ratio of 18 "on very depressed earnings," Lane says.

Ram Holdings Limited (RAMR) just went public this month. A reinsurance company (an insurance company for insurance companies), its market is primarily municipal bonds and structured finance deals. The company has only 15% of the muni reinsurance market, Lane says, but he predicts that its share will grow. Reason: There are only a couple of reinsurance firms in the muni area, and muni bond fund managers want the risks spread among several reinsurers. The stock's market cap is just $365 million. "It's dirt cheap; nobody cares about financials right now," says Lane. He thinks the company will earn $1.50 per share next year, giving it a P/E of 9. And he expects earnings to grow 20% annually. If he's right, the stock could soar.




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