A Small-Cap Fund's Winning Discipline


Compass follows a high-growth path


Sandra Ward



  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

  portfolio management.


  ``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

  rate: 81%.


  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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