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State Street Research Aurora

Patience has paid off for this big, small-cap value fund

There are currently about 270 names in the State Street Aurora fund. That's down from the roughly 300 held when the fund first started in 1995, but that's nothing of concern for this $4.2 billion small-cap value fund to handle.

John Burbank is portfolio manager of the State Street Aurora fund, (877-773-8637). He's been the fund's portfolio manager since April of 2001, and co-manager of it since January 1998.

Through March 25, the fund was up over 6 percent--that's right in line with the performance of the average small-cap value fund, according to Lipper. But look at this fund's long-term performance and it's anything but average. For the last three-years the funds' average annualized return was 33.48 percent and over the past five years, 21.82 percent, according to Morningstar data.

When Burbank is out looking for companies to invest in, here's what he looks for: "We like to buy early and when they ( stocks) are priced at a discount to whatever strategic buyers will pay for an asset. We're also very intent on finding companies with free cash flow; not particularly focused on short-term quarterly earnings; and, want to see 100 percent upside in three years. So we're going to buy early, sit on a name, add to it slowly in anticipation of an ultimate payoff. And that's how we embed really good values in the fund---by being patient."

Here's more from Burbank about the State Street Aurora fund (SSRAX):

Q: When I look at Morningstar, they have this fund classified as a small value fund. But when I check Lipper, it's listed as a small-cap core fund. What kind of fund do you say it is?

Burbank: Our in-bound decisions, that is, according to our buying decisions, we are clearly small-cap value. There is no question about it.

Q: Tell me about the top sectors the fund invests its assets in.

Burbank: We're a very bottom-up focused fund so the sector weightings that we end up with tend to be a by-product of our decisions and not the driver of our decisions. Having said that, the top five sectors right now include a big overweighting in property-casualty insurance; energy; transports--that includes both regional airlines and automotive parts; consumer discretionary--- by that I mean gaming and entertainment; and semi-conductor/capital equipment.

Q: I was just in Biloxi, Mississippi last week and could not believe how popular the gaming industry is there. Why do you think that industry has become so hot?

Burbank: It's entertainment and it's part of travel. Of course in the third quarter of last year it got hammered hard because of 9/11, but it's a travel/entertainment thing. Part of your R & R, people's rest and recreation. And there's always the hope that they are going to walk away a millionaire.

Q: What's a name you like in the gaming industry and ones you like in some of the fund's other top sectors?

Burbank: In gaming we're big holders of IGT, International Game Technology. They're in the business of designing and manufacturing slot machines and two things are happening in that business: The software that they put in these new slot machines makes it like betting on movies--- so you get better machines and that draws traffic. And the other thing is, state laws are changing allowing for slot machines to be utilized in geographic locations where they couldn't be utilized before. Like on Indian reservations in California.

As for transports, we like the regional airlines. All airline stocks got hit hard in the wake of 9/11 so right after that tragedy we kind of paused and re-evaluated the situation. Then, after a few weeks and once we sure we still had our feet on the ground, started adding to the same names we had before that event. One of the names we like there is Mesa Air Group. They are headquartered in Phoenix, and they have code-sharing alliances with American West and US Air. Instead of being a hub-and-spoke airline, these code-sharing regional alliances just fly the little spokes to get people into the hubs where they transfer to through aircraft.

And in the energy sector, Methanex. It's one of the largest producers of methanol in the world,. They generate a lot of free cash, and we love free cash flow, and, since the mid- '90s has bought back about 35-40 percent of their shares outstanding. We've put positions together in that stock in the past, have a full position now and it's just beginning to pay off.

Q: Anything that might be misunderstood about this fund from a new investor's point of view?

Burbank: Again, it is a small-cap value fund and does have a cyclical tilt to it that gets accentuated during periods of economic slow down.


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

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