FUND WATCH


Superb Record Put to the Test

Elizabeth Ody

The father-son team behind Auer Growth tries to extend their amazing personal performance to a new mutual fund.



The problem with new funds from new money-management shops is that there's usually no track record by which to judge the manager. So when the father-son team of Bryan and Bob Auer decided to launch Auer Growth fund, they wanted to tackle the performance-information issue head on.

The prospectus for their new fund (symbol AUERX) shows 20 years of performance history. According to the fund's prospectus, IRAs belonging to Bryan and his wife returned an astonishing 30% annualized through the end of the third quarter of 2007. To appreciate how spectacular that is, consider that $1,000 returning 30% a year for 20 years grows to more than $190,000.

And this isn't some back-of-the-envelope numbers trick. The Auers hired high-profile auditors to verify and inspect the returns and report their findings back to the Securities and Exchange Commission. The auditors concluded that figures in the prospectus accurately represented the duo's performance -- and even accounted for the expenses an investor would have paid.

As impressive as the numbers are, they are the product of a strategy that seems childishly simple. The Auers look for companies whose profits are at least 25% higher than they were a year ago and whose stocks sell for 12 times earnings or less (the Auers use a number of inputs to determine which earnings numbers to use).

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A company's size and nationality do not matter to the Auers. They'll buy anything that trades on a U.S. exchange so long as it's "wild growing," as Bob Auer puts it.

But the Auers's methodology also includes "secret sauce." What's in that sauce is, well, secret. However, Bob Auer allows that among the clues he and Dad look for are order backlogs, insider buying of company stock and specific words executives use in their public comments. "If management says the company's outlook is 'outstanding' instead of 'strong,' then that can be a clue," said Auer the younger.

All companies that pass the growth and value test make it into the portfolio. The "secret sauce" determines a company's weighting in the fund, which now holds $57 million in assets. The Auers will hold a stock until its price doubles or the company no longer meets their growth criterion.

The Auers' accounts have been wildly volatile -- losing as much as 26% in a single quarter. But the portfolio has also pulled off some incredible feats. In 2000, it gained 27% as the Standard & Poor's 500-stock index lost 9%. In 2001 and 2002, the portfolio gained 52% and 16%, as the S&P lost 12% and 22%, respectively. In 2003, their best year, the Auers gained 155%. In 1998, their worst year, they lost 18%.

It's certainly too early to judge the mutual fund, which was launched in December. Year-to-date through April 16, it lost 0.7%, nearly six percentage points ahead of the S&P 500.

At last report, according to Morningstar, Auer Growth held 212 stocks, well mixed among those of large, midsized and small companies.

Bob Auer says investment opportunities are a dime a dozen today. He likes, for example, Greenhill & Co. (GHL), a small investment banking and consulting company that's "exactly what Goldman Sachs used to be -- nimble and smart."

He's also big on a small tilapia-farming company, HQ Sustainable Maritime Industries (HQS), that he says is negotiating with McDonald's and Burger King to supply fish fillets. "Seafood consumption is growing in the U.S. and tilapia is the single, fastest-growing seafood item," he says.

The fund isn't cheap. Auer Growth charges 1.95% in annual expenses. That figure could come down a bit as assets expand, but it can't drop too much because the management fee (part of the overall expense ratio) is a stiff 1.5% per year.

If you're willing to look past the high fees and believe that the managers can maintain those other-worldly results as their asset base expands, you might want to give Auer Growth a shot. But your commitment will be substantial. The initial minimum investment requirement is $10,000.




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