Picking Small Stocks With Big Promise

Morningstar fund analysts caution investors about the risks of putting money to work with small-growth funds, given their volatility as well as the number of speculative companies dotting the category.

But if investors do want to commit capital to a small-growth fund as part of a diversified portfolio, analysts write, they should consider Pioneer Oak Ridge Small Cap Growth (ORIGX) given its experienced management, below-average volatility, and impressive track record.

David Klaskin, who has captained the fund since its inception in 1994, relies on a price-sensitive, bottom-up approach to pick companies with consistent earnings growth, attractive valuations, and strong fundamentals.

The investment pro's conservative approach to stock selection has hurt him during the recent rally, which he says has been led by speculative equity and debt securities. Year-to-date, he's trailing his Morningstar peers.

But, over the long haul, analysts remind investors that Klaskin's prudent approach has paid off handsomely. Through December 21, the fund's 10-year annualized total return of 5.13% outpaces the Russell 2000 Growth Index and bests its Morningstar rivals by 6.04 percentage points, or 85% of its competitors.

ORIGX, which carries a front-end load of 5.75%, requires a minimum investment of $1,000. The fund is currently open to new investors, and the median market cap of the companies in his portfolio is $1.5 billion.

"I guess, to an extent, we are boring," Klaskin tells Minyanville. "People know what to expect from us. I want people to be able to invest money with us and then leave it alone for 10 years."

Recently, we caught up with the 49-year-old Klaskin from his offices in downtown Chicago. We chatted about his views on the economy, the stock market, and some of his favorite picks right now.

Minyanville: Explain the fund's investment strategy and process for us.

David Klaskin: The small-cap fund started in 1994. Nothing has changed in terms of what I am looking for: I want to buy the fastest-growing companies that are reasonably priced. If you find a real fast grower, it isn't likely to sustain that pace. If it's high valuation, the risk/reward is unfavorable.

Minyanville: How are you different than other growth managers?

Klaskin: We are very long-term oriented here. Now, that hasn't mattered that much until recently. But low turnover for a small-cap manager has a lot of benefit you can't quantify. We are looking for names we can put away for two, three, four years or longer.

Minyanville: Have you tweaked your investment process at all over the past year?

Klaskin: No, there has been no change in the process. It is still bottom up. We just focused more on revenue and balance sheets than we might normally do.