Second time's a charm: after making a false start, B.E. says now is a better time to buy mid-cap growth funds. (Mutual Fund Focus).

We got it wrong. We thought December 2000 was a good time to jump into mid-cap growth funds. That wasn't the case, although it looks to be true now.

Our thinking at the time was this: Funds investing in the growth stocks of mid-range companies had done well during 1999 when they returned an average 65% total return. The streak continued during the first eight months of 2000, with mid-cap growth funds posting an average 43.10% gain, compared to 10.64% for the Standard & Poor's 500 index.

Wall Street calls that kind of thinking momentum investing, just a fancy way of saying that you're using your money to chase trends that have already taken flight. In this case, however, the economy cooled and profit growth hit the skids. Mid-caps, the stocks of companies with a market value ranging roughly between $1.3 billion and $8.7 billion, lost momentum. When 2000 closed, mid-cap growth funds had lost an average 4.7%, according to Morningstar. That's a bit better than the -9.1% the Standard & Poor's 500 index managed, but an ugly showing, nonetheless.

Now, 18 months later, a cool economy has turned cold. Yet, for investors on their toes, it's a good time to build positions to benefit from a drop in stock prices and an economic rebound down the road. For starters, stocks--and mid-caps in particular --are cheaper than they've been in quite some time. The week following the. Sept. 11 catastrophes, almost any market index you could point to had dropped 10% or more, including the S&P 500 and Dow Jones industrials.

Yet, mid-cap stocks managed to do worse than that. Data compiled by the Frank Russell Company, a Tacoma, Washington-based firm that tracks stock market statistics, shows the Russell 1000, the firm's index that tracks large- and mid-cap stocks, dropped 8.48% during September 2001.

In the later stages of a recession and at the beginning of an economic recovery, mid-caps historically show a lot of get-up-and-go. Consider statistics compiled by New York-based Prudential Securities Strategist Steven DeSanctis covering market activity during 10 recessions between the years 1945 and 1991. On average, as the slowdown was ending, mid-cap shares averaged a 21.3% total return, while large caps posted 15.8% over the same period.

"During recoveries [in] the past two decades, the statistics show mid-caps tend to outperform large company stocks during rebounds," says Dave Hintz, a senior research analyst with Frank Russell.

That left us with the task of finding solid mid-cap growth funds. We tapped Morningstar's databases and looked for portfolios with the best returns over the past three years. As of the end of January, a few managed to log gains for 2001, but overall, our top five posted very solid total returns of between 14% and 27% over the previous 36 months.

The mid-cap growth portfolio at the top of our list also weathered 2001 with a sizeable gain. Needham Growth (NEEGX), a fund Morningstar gives its top five-star rating, managed a 12.1% return last year, and 27.4% annually over the last three years. Needham Growth tends to carry a heavy weighting in tech stocks, but will also short companies its manager feels are too highly priced.

Number two on the list, Calamos Growth A (CVGRX), also ranks five stars in Morningstar's books, didn't fare quite as well in 2001, registering a -7.7% total return that year, but has nonetheless managed a 24% average annual tally over the last 36 months. Last year, Calamos did a good job of steering clear of a rocky market by sticking with service companies such as Alliance Gaming (Nasdaq: ALLY) and H&R Block (NYSE: HRB). It helped the fund's diversification to have a moderate weighting in the technology sector, which suffered heavy losses for the year.

Top Mid-Cap Growth Mutual Funds

                         Year-to-Date     1-Year Ann.      3-Year Ann.
Fund Name (Ticker)       Total Return *  Total Return *  Total Return *

Needham Growth (NEEGX)       -0.07%         12.07%          27.43

Calamos Growth A
(CVGRX)                       0.53          -7.68           23.95

Heritage Mid-Cap Stock
A (HMCAX)                     0.22          19.15           23.90

SSgA Aggressive Equity
(SSAEX)                       2.33         -19.63           20.02

AIM Mid-Cap Equity A
(GTAGX)                       0.00           0.52           17.69

Fidelity Mid-Cap Stock
(FMCSX)                      -1.99         -12.80           15.89

Fidelity Adv Mid-Cap A
(FMCDX)                      -2.79         -13.04           14.97

Osterweis (OSTFX)            -1.51          -9.84           14.84

Putnam Capital Opport.
A (PCOAX)                    -1.45          -2.08           14.72

                                                           Minimum
                         5-Year Ann.     Toll-Free         Initial
Fund Name (Ticker)       Total Return *    Number          Investment

Needham Growth (NEEGX)       23.59       800-625-7071       $5,000

Calamos Growth
A (CVGRX)                    26.58       800-823-7386          500

Heritage Mid-Cap Stock
A (HMCAX)                     N/A        880-421-4184        1,000

SSgA Aggressive Equity
(SSAEX)                       N/A        800-647-7327        1,000

AIM Mid-Cap Equity A
(GTAGX)                      11.86       800-959-4246          500

Fidelity Mid-Cap Stock
(FMCSX)                      17.45       800-343-3548        2,500

Fidelity Adv Mid-Cap A
(FMCDX)                      16.76       800-522-7297        1,500

Osterweis (OSTFX)            18.72       866-236-0050      100,000

Putnam Capital Opport.
A (PCOAX)                     N/A        800-225-1581          500

* AS OF JAN. 31, 2002

SOURCE: MORNINGSTAR INC.