Surviving the bad times in the fund industry.

And the meek equity fund shall inherit the mutual fund industry.

A few years ago managers of a group of small stock funds-usually part of smaller shops with rather modest asset bases-didn't go along with the New Age nonsense that proclaimed the business cycle was dead, earnings meant nothing, and stock P/E ratios didn't matter. These staid funds, which were unpopular in the last go-go decade, now are the top performers of a humbled industry.

"The theme of these funds tends to be small-cap and value, but there have been a few large-cap growth funds that have also done well," says Russ Kinnel, Morningstar's director of fund analysis.

The "meek" funds have made money even in bad times. Some examples cited by Kinnel include Liberty Acorn-up 3.38% annualized for three years through the end of April-a fund that is buying low-priced financial concerns, such as Americredit, and service companies, such as ITT Educational Services and Global Payments.

Another meek group is Franklin Templeton's Mutual Series, which includes its Beacon Fund. The latter (which recently included lead positions such as Berkshire Hathaway, Kroger, Liberty Media and British American Tobacco) is plus 2.29% in the same period. The S&P 500, in the same three years, is down an average 12.96% a year.

"Most of all, the few equity funds that made money were run by people who didn't get carried away and overpay for stocks in the 1990s," Kinnel adds. What other characteristics do these funds share?

They are not overconcentrated in a few stocks or a sector, Kinnel notes. They aren't betting on a few companies. They didn't make wild promises about the supposed end of the business cycle and the market never going though bearish times. They didn't go gaga over techs or dotcoms that had yet to show any earnings or potential earnings. They ignored the advice of a famous fund manager, James Craig, who justified a 44 p/e portfolio ratio in 2000 by saying: "We're now heavily weighted in the new media and technology area, but that's where the big changes in the economy are. I don't see that there are going to be any major changes in that thesis."

Traditional managers disagreed with that thesis. But they also had investors who were angry with them in the late 1990s, when they were lagging the market and their peers.

And sometimes, to the consternation of shareholders, they have had considerable cash holdings. "We got a lot of grief from many of our clients, who took their money and went out the door," says Gerald Perritt, manager of the Perritt Micro Cap Opportunities Fund (up 12.5% a year for a three-year period through the end of April. He typically buys low-price stocks such as Matrix Services). Perritt runs a one-fund shop based in Chicago, and is part of a small group of funds that are muddling through the bear market very well. Some even have had a fat year or two during this gruesome period.

We're speaking of a select class of equity funds that have made it through this rough three-year period in which most equity funds were bloodied. These funds were making money or just about breaking even in the last three years-a period that came right after the "New Economy" promised an end to bear markets and which saw trillions of dollars in equity get vaporized.

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