Middle of the road.

Midcap growth funds continue their drive for top performance

There are times when being in the middle is a good thing. The new century thus far has favored midcap growth funds, which returned over 19% through August. Such funds tend to invest in companies that are neither household names nor start-ups but that fall somewhere in between. The midcap sector outperformed any other type of fund holding a mix of domestic stocks, according to Morningstar Inc. in Chicago, which tracks mutual funds.

According to Morningstar, the term "midcap" is a shorthand way of saying "middle-sized capitalization." The typical midcap company has a market value of around $9 billion, compared with $69 billion for large-cap companies and a little more than $1 billion for small-caps. Midcap funds emphasize midcap growth stocks where sales and earnings are expected to accelerate rapidly--recent holdings include lesser known, established firms such as Med-Immune Inc. (Nasdaq: MEDI), Citrix Systems (Nasdaq: CTXS), and Comverse Technology Inc. (Nasdaq: CMVT).

Among all categories of diversified U.S. stock funds, the midcap growth category has been the leader in annualized returns for the past three (32%), five (25%), and 10 (21%) years. In 1999, the category returned a sizzling 65%. "Midcap growth funds have the heaviest technology weighting of any diversified stock fund," says Kelli Stebel, an equity fund analyst at Morningstar. "That has made them volatile, but they have produced excellent returns overall." Several fund managers boosted returns this year by well-timed moves into hot areas such as biotechnology and energy.

Midcap funds bode well for individual investors looking to add more than growth potential to their portfolios. "They're a distinct asset class," says Percy Bolton, a certified financial planner in Pasadena, California. "Including them in a diversified portfolio can increase overall stability because they may hold up when other investments don't do well." When smallcap value funds fell in 1998, for example, midcap growth funds came through with a return of nearly 18%.

Bolton suggests that an aggressive investor might hold 15% of a portfolio in midcap growth funds, but the more conservative investor might hold 15% of a portfolio in small cap and midcap funds. "If you want to invest through mutual funds," says Bolton, "you have to look hard at what's actually in the fund. The name of the fund may not matter." Indeed, some midcap growth funds are "barbell" funds, according to Stebel. In other words, they hold a mix of small- and large-cap stocks so that they wind up with an average that's in midcap territory.

"Many midcap growth funds are high-turnover funds," says Lewis Walker, a Norcross, Georgia-based financial planner. "If they trade a great deal, [those trades] may realize gains, which must be passed through to investors. Therefore, if you have the option, you should hold these funds in a retirement plan such as an IRA or a 401(k) where taxes can be deferred."

Walker contends that many investors are underweighted in midcaps because they focus on large companies with familiar names. "Therefore, they miss out on some great growth opportunities," he says. Bolton's category favorites are Turner MidCap Growth (TMGFX), Van Kampen Aggressive Growth (VAGAX), Citizens Emerging Growth (WAEGX), and Transamerica Premier Small Co. Investors (TPSCX). Stebel's picks are INVESCO Dynamics (FIDYX), Janus Enterprise (JAENX), MAS Mid-Cap Growth (MACGX), and T. Rowe Price Mid-Cap Growth (RPMGX).

Often, the chance of finding market inefficiencies is greater among midcaps than among large caps, which tend to get greater attention from Wall Street analysts. Over the first half of the New Year, investors can hope that such middling funds continue to run in front of the pack.

TOP 5 MIDCAP GROWTH FUNDS

                                     Year-to-Date      1-Year Ann.
Fund Name (Ticker)                  Total Return(*)   Total Return

Gartmore Millennium (NMCGX)              70.54%           85.48%
Pin Oak Aggressive Stock (POGSX)         60.46           145.48
Calamos Growth A (CVGRX)                 48.89           122.28
Sentinel Mid-Cap Growth A (SNTNX)        47.47            89.76
Provident Inv. Council
  Mid-Cap A (PIMAX)                      47.08           129.33

                                     3-Year Ann.    5-Year Ann.
Fund Name (Ticker)                  Total Return   Total Return

Gartmore Millennium (NMCGX)            30.44%         26.83%
Pin Oak Aggressive Stock (POGSX)       60.77          40.93
Calamos Growth A (CVGRX)               48.06          42.85
Sentinel Mid-Cap Growth A (SNTNX)      36.21          31.82
Provident Inv. Council
  Mid-Cap A (PIMAX)                      N/A            N/A

                                                    Minimum
                                     Toll-Free      Initial
Fund Name (Ticker)                     Number      Investment

Gartmore Millennium (NMCGX)         800-848-0920     Closed
Pin Oak Aggressive Stock (POGSX)    888-462-5386     $2,000
Calamos Growth A (CVGRX)            800-823-7386        600
Sentinel Mid-Cap Growth A (SNTNX)   800-282-3863      1,000
Provident Inv. Council
  Mid-Cap A (PIMAX)                 800-618-7643      2,000

(*) Return as of 8/31/00.

Source: Morningstar Inc.

BOTTOM 5 MIDCAP GROWTH FUNDS

                                      Year-to-Date      1-Year Ann.
Fund Name (Ticker)                   Total Return(*)   Total Return

Duncan-Hurst Aggressive Gr R
  (DHAGX)                                    8.19%        63.19%
Putnam OTC Emerging Growth (POEGX)          -8.59         74.53
Fountainhead Special Value (KINGX)          -9.30         47.41
Kobrick Capital A (KFCFX)                  -12.73         30.24
Kobrick Emerging Growth A (KFEGX)          -14.29         35.13

                                      3-Year Ann.    5-Year Ann.
Fund Name (Ticker)                   Total Return   Total Return

Duncan-Hurst Aggressive Gr R
  (DHAGX)                                   N/A           N/A
Putnam OTC Emerging Growth (POEGX)       32.62%        25.62%
Fountainhead Special Value (KINGX)           33           N/A
Kobrick Capital A (KFCFX)                   N/A           N/A
Kobrick Emerging Growth A (KFEGX)           N/A           N/A

                                                     Minimum
                                      Toll-Free      Initial
Fund Name (Ticker)                      Number      Investment

Duncan-Hurst Aggressive Gr R
  (DHAGX)                            800-558-9105     $2,500
Putnam OTC Emerging Growth (POEGX)   800-225-1581        500
Fountainhead Special Value (KINGX)   800-868-9535      5,000
Kobrick Capital A (KFCFX)            800-225-5478      2,500
Kobrick Emerging Growth A (KFEGX)    800-225-5478      2,500

(*) Return as of 8/31/00.

Source: Morningstar Inc.