Top-rated small stock fund managers optimistic

- Alan Lavine and Gail Liberman

Typically small company stocks lead the way out of a bear market and a recession. The reason: It doesn't take as much of an increase in profits to boost the bottom line in a small company's finances. Smaller companies will show a higher percentage of growth in earnings compared with large companies.

The Century Small Cap Select Fund, Boston, has done well over couple of years. Lipper Inc., a New York-based research company, rates the fund as the best small company growth stock fund this year. So far, the fund is up 3 percent. Over the past year, it gained 6.1 percent. That's not bad when you consider the S&P 500 lost -20 percent over the same period.

The fund typically invests in insurance companies, insurance brokers, banks, health care, financial technology, business services and education services.

Lanny Thorndike, manager, likes to invest in companies with proven management teams and a growing market share. Earnings must grow in both good times and bad. The companies must be cash rich and have little debt. And, their stocks must be cheap compared with their peers. Largest holdings include Charles River Labs International Inc., Stericycle Inc. and Sunrise Assisted Living Inc.

The MFS International New Discovery Fund has been doing well in the overseas small company stock markets. The fund ranks at the top of its class over the past five years. The fund has grown at a 5 percent annual rate over the past five years. By contrast, the S&P 500 has grow at about a 1 percent annual rate.

Manager David Antonelli says overseas small stocks are a good buy. The stocks are cheap in relation to their earnings compared with large companies. The earnings of small overseas companies are growing at 14 percent--three percentage points more than large companies.

Antonelli likes to buy fast-growing companies that are cheaper than their peers. His average holding is growing earnings at 24 percent. Largest industries: financial services, leisure, health, technology and energy. Largest holdings: Encana Corp., Talisman Energy Inc. and Uni-Charm Corp.

Be advised that small company stock funds are volatile. You can see wide swings in annual returns. You can experience double- digit gains as well as losses. And past performance is no indication of future results. The fund managers agree that it is best to make these funds a small part of you overall mutual fund holdings.

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Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).