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Buy This Fund Now

Steven Goldberg

Champlain Small Company, a gem of a fund, will close to new investors October 15. Here's why you should invest -- now.



Warren Buffett once likened investing to batting in baseball. The difference: In investing, there's no penalty for resting your bat on your shoulder as you watch countless pitches whiz by -- so you can wait until a truly "fat pitch" comes along before you swing. Such fat pitches are rare, but when they come, it pays to swing hard.

Today, Champlain Small Company (symbol CIPSX), a member of the Kiplinger 25, looks like a fat pitch to me. But if you want in, you'll have to step up to the plate quickly. The fund is closing to new investors October 15.

Champlain is a wonderful fund. What's more, there are virtually no other small-cap funds open to new investors that look nearly as attractive.

The fund's record, while relatively short, is superb. It returned an annualized 15.5% from inception in late 2004 through October 4. That's an average of four percentage points per year better than the Russell 2000 small-cap stock index and good enough to put it in the top 18% among funds that specialize in stocks of fast-growing small companies, according to Morningstar.

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Top-notch management

Despite the fund's youthfulness, its managers are no novices. They ran Sentinel Small Cap from November 1995 to September 2004. Over that time, Sentinel returned an annualized 15%, beating the Russell 2000 by an average of 11 percentage points per year and the Russell 2000 small-cap growth index (which measures the faster-growing companies in the Russell 2000) by an average of six percentage points per year. Wow!

Moreover, the Champlain team has tended to do best in markets inhospitable to stocks of small companies -- and we appear to be in just such a market now. Sentinel shed a mere 4% during the brutal 2000-2002 bear market, while the Russell 2000 tumbled 30%. That buoyancy in bad markets was on display again last June and July when the Russell plunged more than 8% but Champlain dipped just 2.5%.

Lead manager Scott Brayman brought practically the whole team with him when he left Sentinel to found his own shop in late 2004 in Burlington, Vt. Champlain's four co-managers all worked for years with him at Sentinel. At 46, Brayman has more than 20 years investment management experience, and his co-managers average more than 15 years apiece.

Champlain boasts lots of other positives. The firm is employee owned -- and does nothing but invest in small and midsize companies. I like fund companies whose managers have a stake in the long-term future of the company and who focus on doing one thing well. Expenses, at 1.41% annually, are a shade high, but not egregiously so. The average market value (share price times number of shares outstanding) of the fund's holdings is $1.3 billion-and the portfolio includes plenty of much-smaller companies. Turnover has generally been about 50% annually.

Champlain typically lies on the cusp between small-cap core and small-cap growth. Its holdings for the most recent quarter place it solidly in small-cap growth-but that's only because that's the most attractive part of the small-cap market these days. That's why I've ranked the fund against both the Russell 2000, an index that covers the whole universe of small-cap stocks, as well as small-cap growth benchmarks.

How they do it

Champlain employs an investment process that impresses me as more thorough than most competitors. According to the fund's annual reports, the managers start by insisting that companies have a durable competitive advantage. For instance, in consumer stocks they look for brand loyalty and avoid companies with hot products likely to go out of style. They also tend to avoid cyclical companies.

Next they look for good cash flow, low debt and "sincere and capable management." To judge these two last items, they examine how corporate officials compensate themselves, who's on the board of directors and whether the company has a stable business model and a solid record of growing earnings.

But Champlain won't invest even in a great company unless the stock sells at a discount to what the managers judge to be the firm's "intrinsic value." To determine that value, the managers look at selling prices of companies taken over in the same industry. They also analyze cash flow using several models. Finally, they look for a catalyst, "a secret sauce" that can turbocharge future earnings. This might be a new product line or high spending on research and development in a promising area that could result in exciting new products down the road.

What could go wrong

Buying a fund just before it closes is usually a losing strategy. Generally, funds don't close until well after their asset bases have grown beyond the point of easy manageability. This isn't surprising. Look at it from the manager's perspective: The more assets under management, the greater the management fees and the more profitable the firm. In addition, funds usually don't show symptoms of asset bloat until the market turns against the type of stocks they specialize in -- and that usually occurs after the influx of assets has already slowed.

But Brayman said from the outset that he would stop accepting new money once his firm's assets under management hit $1.5 billion -- about what he managed at Sentinel. Currently, assets firmwide stand at $1.2 billion, including $300 million in the fund. Champlain has just begun accepting private money into a new midcap strategy, but there shouldn't be much overlap between the firm's holdings in midcaps and those in small caps, a fund spokesperson said. There are no plans to launch a midcap fund.

I can't say I'm thrilled that Champlain announced its closing several weeks before the fact. I've watched other funds use closing announcements as marketing opportunities -- with all the tawdry taste of going-out-of-business sales. The upshot can be too much money pouring in before the actual closing.

But I doubt a torrent of cash will flood into Champlain. Brayman and company have kept an almost ridiculously low profile. They almost never talk with the media. They don't seem to particularly like individual investors -- for fear they will flee when the market inevitably turns against the fund. That serves to make the fund's asset base more stable, a good thing for those who plan to stay invested a long time.

The initial minimum is $10,000 in taxable accounts, and $3,000 for IRAs. But you can start with less at many online brokers. If you prefer to invest directly, the fund's website is at cipvt.com. Look hard: The application is somewhat buried. Or you can get an application by mail by calling 866-773-3238. But if you're interested, act quickly: If your application isn't in by the end of the day October 15, I think you'll regret missing this opportunity.

Steven T. Goldberg (bio) is an investment adviser and freelance writer.




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