Newspaper article THE JOURNAL RECORD

Small-Cap Fund Managers Face Growing Pains

Newspaper article THE JOURNAL RECORD

Small-Cap Fund Managers Face Growing Pains

Article excerpt

NEW YORK -- Money managers who oversee mutual funds that focus primarily on small companies are facing growing pains.

The problem stems from small stocks that don't stay small very long.

Given the almost hysterical demand among investors for shares of technology companies, many small tech stocks are being transformed almost overnight into large stocks. That explosive growth means small stock fund managers have to sell the shares of rapidly growing companies once the stocks no longer fit the stated goal of a small- capitalization sector fund.

The dynamic is frustrating to small-cap fund investors, who are essentially being punished for getting in too early on a successful stock. In addition, investors get hurt because funds are required to pay taxes on stocks that are sold, and those costs are paid by fund shareholders. It's also frustrating to fund managers, who hate being forced to sell their most successful companies.

"It breaks our hearts," said Phil Fine, a co-manager of Boston- based Loomis Sayles' Small-Cap Growth fund. "I heard another fund manager say these companies stop for a cup of coffee in small-cap territory then they move on, and that's the truth. A lot of great names that used to fall into the small-cap category have moved quickly up to mid and large-cap status."

Take SDL Inc., a fiber-optics company that less than a year ago had a market capitalization of around $850 million, well below the $1.5 billion ceiling established for the small-cap category.

Market capitalization refers to a company's stock price multiplied by the number of shares the company has issued.

So when SDL Inc.'s stock was trading at around $23.75, the company had a market capitalization of $850 million because SDL has issued 35.7 million shares. But when the stock started soaring in 1999, climbing as high as $288.50 recently, the value of the company surged past $9 billion. …

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