A rough start to the year has become a kind of backhanded blessing to the
Oppenheimer Small & Mid Cap Value Fund (QVSCX). The fund's assets have dropped to around $4.2 billion, from a peak of $5.7 billion a year ago, and management has decided to reopen the fund to new investors beginning June 2. It was closed to new investors last May.
"At this point, we're comfortable that we can handle new inflows, and we don't think there's any negative impact to existing or new shareholders to opening the fund now," said portfolio manager John Damian.
The fund, which was launched in January 1989 as a pure small-cap-value fund, has evolved over the years in stride with asset growth.
OppenheimerFunds Inc. in New York was using subadvisers to manage the portfolio until September 2001 when Mr. Damian took over as manager. At that time, the fund had $350 million under management.
By the spring of 2005, assets had swelled to $1.5 billion, so the decision to expand beyond the parameters of the smaller companies to include mid-cap stocks was made.
"We felt we needed to either close the fund or expand the flexibility to include mid-cap companies," Mr. Damian said. "The decision to expand the fund into mid-caps was driven by the fact we saw better valuations in some of the larger names, and that gave us a bigger universe to research."
According to the fund's prospectus, at least 80% of the portfolio must comprise companies with market capitalizations of less than $13 billion.
The fund's current weighted median market cap is $4.5 billion.
"We needed to put the brakes on a year ago," Mr. Damian said. "Up to about $5.5 billion or $6 billion, we can run this fund very comfortably."
The fund, which has a four-star rating from Morningstar Inc. in Chicago, outperformed the small-cap-blend category average each year from 2001 through 2006.
Despite the fund's strategy's evolving beyond smaller company stocks in 2005, it wasn't moved to Morningstar's mid-cap-blend category until last year when it beat the category average 4.8% gain with a gain of 9.1%.
This year through Thursday, the fund was down 2.5%, while the category average was down less than 1%.
The Russell 2500 Value Index, which Mr. Damian uses as a benchmark for the portfolio, was up 1.2% over the same period.
In 2007, the Russell benchmark declined by 7.3%.
While the first quarter of 2008 has not been kind to the fund, Mr. Damian's reputation is worth the ride, according to Morningstar fund analyst David Kathman.
"Given Damian's track record, we're not too worried about the short-term slump," Mr. Kathman wrote last month as part of his analysis of the fund.
Mr. Kathman also gave credit to the fund's management for closing to new investors when assets grew beyond $5.5 billion, and he pointed out: "The good returns have come in a wide variety of market conditions over the past five-plus years."
The portfolio typically will hold between 80 and 100 positions, with the top 10 stocks representing 20% of the fund's assets.
The bottom-up stock selection process begins with a "rough cut" of the broader equity markets to create a universe of about 1,200 small- and mid-cap-value-oriented stocks, Mr. Damian said.
From there, the idea is to look more specifically at individual stock price valuations and to identify stocks that are leading in their respective sectors.
"Within the value universe, the greatest source of outperformance is stock selection," Mr. Damian said. "We're trying to identify key drivers, and we're looking for names that the street isn't yet paying attention to."
Risk, which Mr. Damian characterized as being budgeted, is managed partially by keeping the various sector weightings from straying too far from the Russell benchmark.
Financial-sector stocks, for ex-ample, represent 21% of the index, which the fund is underweighted by 3 percentage points.
Meanwhile, the financial-sector stock Everest Re Group Ltd. (RE) represents one of the top 10 positions in the fund. Hamilton, Bermuda-based Everest Re is a global underwriter of reinsurance.
The stock, which closed Friday at $91.18 per share, had fallen 8.7% since the start of the year, but Mr. Damian likes that it is trading at one times book value and that the company has recovered nicely from some of the financial hits it took during the 2005 hurricane season.
Questions? Observations? Stock tips? E-mail Jeff Benjamin at [email protected].
