FUND WATCH


Small-Company Fund Looks for Big Trends

The managers of TrendStar Small-Cap fund consider demographic data and technological developments when picking stocks.



Tom Laming spends a lot of time looking into a figurative crystal ball. Laming, co-manager of TrendStar Small-Cap fund, invests in stocks of fast-growing companies with bright prospects. In selecting stocks, he tries to identify companies that will benefit from powerful trends over the next three to five years.

But Laming doesn’t rely on pie-in-the-sky forecasts. He prefers to make his sector bets based on demographic data or improvements in technology. “If we can identify a product that is used by a certain age group, then we can take demographic projections out into the future and be really confident in those predictions,” Laming says.

Retailer Ethan Allen (symbol ETH) is a prime example. The major part of its customer base is 45- to 65-year-olds, a segment of the population that is growing rapidly as baby boomers age.

Technological advances brought Arbitron to Laming’s attention. The media research firm (ARB) has launched a digital ratings system called the Portable People Meter in some markers. Arbitron data collectors in most markets take notes on what they hear, but the new device allows the information to be collected automatically. “The accuracy of the new technology is demonstrably better than a pen and paper,” Laming says.

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Laming honed his stockpicking skills at Kornitzer Capital, adviser to the Buffalo funds, which he joined in 1993. In August 2003, he started his own shop, TrendStar Advisors, near Kansas City. Laming co-manages TrendStar Small-Cap and the firm’s other mutual fund, TrendStar American Endeavor, with James McBride, a former Kornitzer analyst.

Spacecraft design inspired Laming’s investment strategy. Formerly an aerospace engineer with a master’s degree from M.I.T., he concluded that it seemed to be “easier to put a satellite in orbit than it was to identify a stock that was going to do well.” Laming wanted answers to the market’s puzzles. “As an engineer, you can rely on Newton’s law, which won’t change from year to year. So I look for longer-term ‘laws’ that I can find that helps explain long-term stock performance,” he says.

Laming uses broad themes to screen stocks. His methods narrow the market to about 400 stocks. From there, he evaluates profit margins, earnings growth rates and balance sheets to determine a stock’s value. Then, he and McBride pick their best ideas, usually 40 to 70 stocks. Although they pay some attention to price, their focus is clearly on identifying fast growers.

The duo won’t make forecasts on sectors they find hard to predict. The randomness of weather and the volatility of commodity prices mean the fund shuns stocks of energy companies, utilities and materials producers. “I’m not sure the price of oil, adjusted for inflation, will be higher ten years from now,” Laming says. “But I will bet my life that the market share of LED [light-emitting diode] lighting will be higher in 10 years.” Based on that conviction, the fund owns shares of Cree (CREE), which makes the LED components, and Color Kinetics (CLRK), an LED manufacturer.

The absence of hot energy and commodity stocks in recent years has held down the fund’s performance in recent years. TrendStar Small-Cap (TRESX; 888-747-4872) returned an annualized 10% for the past three years to February 21, slightly less than the average fund that invests in the stocks of growing small-companies, according to fund researcher Morningstar. Avoiding energy stocks “has worked very well for me for many, many years,” Laming says. “But you know it’s not going to work every year.”

It’s hard to find good funds that invest in small-company stocks, so TrendStar Small-Cap is worth considering. The no-load fund’s expense ratio is 1.36%, below average for the category. And admirably, Laming says he plans to close the fund to new investors once assets, now $260 million, reach $400 million.




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