Trying to decide between large-cap and small-cap companies? One solution might be to stay in the middle--with mid-cap funds, that is.
Once a successful small company establishes itself, it's often not long before it grows into a midsized firm. It's in this area that the Nicholas II Fund has made a mark for itself: Since the fund's inception in 1983, it has returned an average of 17 percent per year to its shareholders. That's well ahead of the 12.26 percent average annual return of its benchmark index, the Russell 2000.
The Nicholas II Fund is part of a small Milwaukee-based mutual fund family founded by Albert Nicholas in the mid-1950s. Nicholas' investing philosophy is based on patience and long-term investing, and his primary investment audience is small investors.
"We really cater to small investors," says David O. Nicholas, portfolio manager of the Nicholas II Fund, president and chief investment officer of Nicholas Company Inc., and son of the firm's founder. "Minimums are low, we have a very low expense ratio, and it's a tax-efficient fund." Because "buy and hold" might as well be the fund's mantra, year-end capital gains distributions typically remain low, making the fund tax-efficient. Shareholders in this fund find their money managed in a conservative, almost Buffetesque, manner.
Nicholas II invests in companies with market capitalizations ranging from close to $500 million to $2 billion. Nicholas says he and the three other analysts on the fund's investment team are, in a sense, bottom fishers. "We don't buy low-quality companies just because they're inexpensive; we buy high-quality companies when they're out of favor with the market, and when people have a dim short-term view of them," says Nicholas.
There are currently 57 stocks in the fund's portfolio. The
largest holding is Health Management Associates, a company the fund
bought more than seven years ago when it had a capitalization of
$1 billion. "That stock has done phenomenally well for us and has now grown to have a market cap of about $5 billion," says Nicholas, who has been managing the fund for five years.
Because investing for the long term is rule number one at Nicholas, the kinds of companies that make it into the fund's portfolio have to be not only the right size and selling at the right price, but also have to demonstrate solid earnings growth. "We're not very good at selling," says Nicholas. "We're good at buying and holding. We try to avoid companies that have variability in earnings and we like to see 15 to 20 percent earnings growth each year for a company."
That criteria means the fund isn't currently investing in cyclicals or commodity-type companies, or technology firms that make computer software. Instead, health-care, financial and other service companies make up almost 75 percent of the fund's holdings. In the fund, you'll find names like Tootsie Roll Industries, outsourcing company Fiserve and uniform rental company G & K Services.
Nicholas says his preferred holding period for a company in the fund is forever. But since that's not always realistic, he usually sells stocks only when they qualify as "mistakes" or "disappointments."
As with any mutual fund, past performance is no indication of a fund's future performance. But for equity investors who like the idea of investing in a fund that's managed for the long term and has racked up an impressive track record, the Nicholas II Fund is worth investigating.
Dian Vujovich is a nationally syndicated mutual fund columnist and author of Straight Talk About Mutual Funds (McGraw-Hill), Straight Talk About Investing for Your Retirement (McGraw-Hill), and 10-Minute Guide to Stocks (Macmillan).