BABSON'S ENTERPRISE FUNDS

Some folks hear "small-" and "micro-cap funds" and automatically think these types of funds only invest in "new "and "emerging" companies but that's not always the case. Here are two portfolios with seasoned small and micro-cap companies in them.

Take a look at the portfolios of the Babson Enterprise and Enterprise 11 funds and while the holdings might not all be names you're immediately familiar with, many of the companies have been around for decades.

"We don't buy IPOs and we don't invest in start-up or what we call "concept" type of companies, " says Lance James, portfolio manager on both the Babson Enterprise Fund and the Enterprise 11 Fund. "In fact, the average age since incorporation of the companies in both portfolios is slightly in excess of 40 years."

The funds are also value funds which--- like small-cap investing--- have been on the right side of the performance market this year.

James uses a bottoms-up research approach when looking for companies and seeks those that have solid balance sheets, strong cash flows, some kind of sustainable competitive advantage and insider ownership.

"We like to see decent insider ownership so that management's focus on profitability is the same as ours, " says James who has been with Babson since 1986.

Here's more about the funds:

Q: What are some of the differences between the Enterprise and Enterprise 11 funds?

James: Two different funds, same investment approach, obviously same portfolio manager and different market caps.

The Enterprise Fund really is a true micro-cap fund with the average market cap typically between 100 and 200 million dollars whereas the Enterprise 11 Fund is what you'd call a more mainstream small-cap fund. The average market cap or median dollar weighted market cap in it is around $758 million which is in line with where the Russell 2000 is.

Q: Is the Russell 2000 the benchmark for both funds?

James: Yes.

Q: Do you see the combination of value and small cap as having any performance legs?

James: Absolutely. Looking at current market conditions, however, some of the questions investors have to ask are if we have a new small cap cycle, is it going to be sustained by some of the growth names or are we going to see a repeat of what happened in the early 1990s.

The last time we really had a small cap cycle began in the fourth quarter of 1990 and ran through the first quarter of 1994. It was also lead by small cap growth stocks and they really had the upper hand in terms of performance through year-end 1991.

Q: But that didn't last long, did it?

James: The overall small-cap cycle lasted about three and a half years. and probably two and a half of those years were dominated by the small-cap value side.

Historically, small-cap value has outperformed small-cap growth. If you look at the Russell indices, when they were put together in the late 1970s, it's the Russell 2000 value index that has clearly outperformed the Russell 2000 growth index. Now (in the recent past) we've seen growth just knocking the socks off the value discipline. But earlier this year, we started seeing a reversal of that with value out ahead and people realizing that it's great to have a high multiples, but sooner or later you have to have some earnings to back that up.

Q: What's a company that's worked well for you and one that hasn't?

James: Advo, it's a direct mail marketing firm that processes printed advertising then targets the distribution to consumers.

We'd been following the company for a couple of years, they've done some nice cost cutting and we think they are turning around their profitability.

One that's been disappointing is La-Z-Boy. It has a wonderful franchise, it's hitting a great demographic---the aging baby boomers---and we're seeing a pick-up in home furnishings, fundamentally everything is hitting on all cylinders, but the stock has been a disappointment.

Q: What's the key to value investing?

James: We aren't just trying to buy companies that are cheap based on price to book or price to cash flow. There has to be earnings growth generated so we are looking for companies that can improve their profit margins and accelerate their earnings because over the long run we do believe that valuation and earnings go together.

FUND: Babson Enterprise Fund and Babson Enterprise 11 Fund SYMBOL: Babson Enterprise Fund: BABEX Babson Enterprise 11 Fund: BAETX TOP HOLDINGS (as of 8/31/00): Babson Enterprise Fund: Lamson & Sessions; Engineered Support Systems; Spectrum Control, Esco Technologies; and Compx International. Babson Enterprise 11 Fund: Carlisle Companies; BJ's Wholesale Club; Herman Miller; True North Communications; and Nabors Industries. PERFORMANCE: Babson Enterprise: Year-to-date thru 9/29/00, up 16.04 percent; year-end 1999, down 7.26 percent. Babson Enterprise 11: Year-to-date thru 9/29/00, up 12.37; year-end 1999, up 6.16 percent. TOLL-FREE: 800-422-2766