Bigger Portfolio Helps Fund Cut Risk

JPMorgan Small Cap Growth Fund is taking on more eggs and spreading them among more baskets.

The $576 million fund's OGGFX portfolio typically holds 110 to 115 names now. Prior to 42 months ago, one of its predecessor funds -- since merged out of existence -- commonly invested in 60 to 70 names.

The more concentrated strategy worked well in the 1990s. But early in this decade the strategy lagged. Culprits included an excess of tech and health care stocks, says Eytan Shapiro. Listed as co-manager, he's in charge of day-to-day fund decisions. Co-manager Christopher Jones is head of the complex's growth group.

Shapiro got the green light to diversify holdings. Also, management was reshaped. Instead of three analyst-managers, Shapiro alone got the helm. Six analysts back him.

"That increased clarity of decision making," Shapiro said. "Sell discipline in particular became tighter. I can stand back and look more dispassionately at those decisions."

And Shapiro put more weight on valuation in making buys. "I characterize us as valuation sensitive, not constrained," he said. He looks at several multiples. They include cash flow, revenues and price-earnings to growth, or the PEG ratio.

"If something is pricey, I'll still pay up," he said. "But only if I see faster growth to bring valuation in line."

That approach has usually worked for the fund. Going into Tuesday, over the 31/2 years since diversifying its portfolio more, the fund's average annual return was 14.52%. Its small-cap growth rivals tracked by Morningstar averaged 11.80%. The S&P 500 averaged 11.77%.

In the 42 months before its shift, the fund averaged a 6.17% annual loss vs. a 9.96% loss for its peers and a 7.23% setback for the S&P 500.

This year the fund has lost 0.79% vs. a 1.10% gain by it peers and a 0.72% loss by the S&P 500.

Focus Forward

Shapiro's focus on valuation shapes his portfolio. It impacts what he buys, when and at what price.

The fund began to buy Verifone PAY at its initial public offering of 10 in April 2005. The fund's overall average cost is 14.21. The firm makes point-of-sale electronic payment systems such as supermarket credit card readers.

In 2005, its earnings per share were 76 cents. Cash flow per share was $1.00. And pretax margin was 14.6%. For 2006 EPS was $1.11. Analysts polled by Thomson Financial forecast $1.53 for this year. Cash flow is $1.36 a share. And pretax margin is 20.1%.

The stock is up 3.95% this year. But it dove below its 10-week moving average two weeks ago and is 12% off its Feb. 20 peak.

General Cable BGC, a top holding, is up 25% so far this year. The firm has five quarters of triple-digit earnings growth. Its cables are in products ranging from utility power lines to cars and consumer electronics.

The fund first bought its current stake on Oct. 20, 2004. Its average cost is 17.16. The stock now trades around 54.

The fund's buying began as the stock sprang off a pullback to its 10-week moving average line.

"This whole business had been hurt by weak end-user demand," Shapiro said. "Now it's sitting on strong secular trends in terms of energy and utilities. There's a huge backlog of maintenance."

American Commercial Lines ACLI, another top holding, is up about 1% this year. The stock was also a top sell by the fund in its latest disclosure. That was to keep the position from getting too big, Shapiro says.

The firm transports commodities via barge. It also makes barges.

"Barge makers are in the best supply-demand dynamic of the past 25 years," Shapiro said. "A lot of owners are scrapping barges because they're worn out. But there isn't a lot of supply. So ACLI benefits."

The company's initial public offering was at 11 in October 2005. It's now trading at about 33. The fund's average cost is 17.80.

"They've got good cash flows. And their margins keep moving up. End-user demand is up steadily."

The fund has several share classes. A shares have a top front load of 5.25% and a 1.25% expense ratio.

Copyright 2007 Investor's Business Daily, Inc.