A Small-Cap Fund's Winning Discipline
Compass follows a high-growth path
If Topps issued a card series for
mutual-fund managers, no set would be complete without a
William J. Wykle. As manager of Compass Small Cap Growth
Fund, the 59-year-old Wykle has compiled some compelling
stats. The fund ranked among the top 10 in its category in
the third quarter and in the past year and in the past three years (1993 was the rookie year for the retail fund),
delivering cumulative returns of 5.26%, 45.14% and 108.30,
respectively. Consider that the average small-cap fund
returned 1.76% in the quarter, 18.40% in the one-year period
and 54.65% in the three-year time frame and you'll
understand the magnitude of the achievement.
There's no contest, either, when you compare Compass with
general equity funds. The average general equity fund gained
2.61% in the quarter, 16.90% in the year ended Sept. 30 and
50% in the three years.
A good eye and a disciplined investment strategy has
resulted in an outstanding and consistent track record,
which recently earned Compass Small Cap a five-star rating
from fund evaluator Morningstar. Compass, with $520 million
under management, is the former PNC Small Cap Growth Fund
and a part of the asset-management arm of PNC Bank.
Wykle concentrates on those companies with market
capitalizations of between $100 million and $1 billion that
generate earnings growth of 20% or more and display equally
strong technical characteristics, so-called relative
strength or share-price momentum. Indeed, the average rate
of earnings growth for the Compass portfolio of 125 to 130
names in 1997 is estimated at 39%.
``We're fishing in ponds where the fish are rapidly
growing,'' Wykle explains in the lush, friendly tones that
give away his West Virginia roots and reveal his love of the
outdoors. (The colorful duck cufflinks peeking out from
beneath his suit sleeves betray his real passion: duck
Once he's netted the fast growers, he then studies their
balance sheets and income statements to determine how well
they're run and the likelihood that they'll sustain the
heady pace of growth. Next, he interviews management to see
if it can articulate a strategy and a vision ``to take the
company to the next level.'' And he limits the research to
three sectors: technology, health care and consumer
services. The Russell 2000 Index is used strictly as a
benchmark for performance, not as a means of picking stocks
and weighting sectors.
Stocks are added to the portfolio in equal measure, so that
they represent 0.5% of the portfolio. Wykle stops buying a
stock when it reaches 1%-1.5% of the total. If a holding
reaches 3% of the portfolio through appreciation and
rebalancing, he trims the name automatically.
``We don't want any one stock having a negative impact on
the portfolio,'' he explains.
And he practices an uncompromising sell discipline, a task
he ranks as the ``most important thing to address'' in
``If a company fails to meet earnings expectations, it is
sold,'' says Wykle firmly. Also, news that could portend
earnings problems will force a sale, as will signs of
fundamental problems. And any deterioration in ``relative
strength'' is reason to purge a name. The policy is
Compass, for example, recently purchased shares of Riscorp,
which provides workers' compensation services to
corporations, mostly in Florida, when that state's insurance
commissioner proposed cutting reimbursement rates for
workers' compensation. Compass immediately turned around and
sold Risc, now a risk.
``You get blindsided,'' says Wykle.
But that kind of attention to discipline and fundamentals
saved Compass after July's correction: ``We came roaring
right back,'' Wykle points out, after being down more than
Wykle and his team of an assistant manager and three sector
analysts meet each Monday to review the holdings in the
portfolio. Yet, for a small-cap fund with strict sell
criteria, the portfolio has a surprisingly low turnover
And Wykle has plenty of new ideas.
Brand new to Compass is Saville Systems PLC, based in
Ireland, a designer of customized billing software for
telecommunications providers. It went public at 10 last
November, and recently changed hands at about 43. Wykle
started buying in the past six weeks, lured by earnings
growth prospects of 35%-40% a year and the potential to
sustain that kind of growth in a climate of deregulation.
Because Saville also provides customer service, Wykle sees
it as an attractive play on corporate outsourcing. The
company, which has U.S. offices in Burlington, Mass, and
which does most of its business in this country, trades on
Wykle is also a big fan of Southern Energy Homes, a
mobile-home maker based in Alabama. Compass owns 4% of it
and has enlarged its position recently as the shares were
buffeted by concerns about a venture in Germany. Wykle likes the steady 20% earnings growth - pointing out that
manufactured homes represent 30% of all new housing in the
U.S. and 40%-45% in the South - and the fact that Southern
Energy not only makes the homes, but sells them, finances
them and insures them. While the firm has stumbled in
Germany, Wykle believes nonetheless that Europe offers
``tremendous'' opportunities for the manufactured housing
Another recent addition to the portfolio is CBT Group PLC, a maker of interactive software tutorial products for high-end applications. Based in Ireland, it is growing at roughly 40% a year. The company went public at 20 a share in April of 1995 and traded recently at 47 3/4, adjusted for a 2-for-1 split in May.
Nice pitches all. But it's knowing when to swing at them
that has made Compass Small Cap Growth a winner.
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