The first time I read the term "emerging growth funds," my eyes may have read the words, but my mind interpreted them all wrong: It thought "emerging market funds." And nothing could be further from the truth. Sort of.
Emerging growth funds invest in everything from the tiniest micro-cap companies to those that have been around for a while and have garnered millions--even billions--in assets. Emerging market funds, on the other hand, invest in new and growing capital markets from around the world.
Because emerging growth funds invest in U.S. companies, there are no political, economic, social, language or accounting risks to contend with as there always are when investing in emerging market funds. The jeopardy of emerging growth funds centers on your ability--and willingness--to take on some extra risks in the hope of securing extra rewards.
The RS Emerging Growth Fund has yielded impressive results. In place for more than a dozen years, its average annual total return of more than 25 percent is sure to catch any aggressive investor's eye.
But numbers don't always tell the whole story. Behind this fund's returns stands a portfolio manager as hyped-up about emerging growth companies as he is about his fund. "What's exciting [about emerging growth stocks] is that things can be incredibly impulsive in terms of growth and potential," says Jim Callinan. "And if you're patient, you can find some explosive ideas that often get overlooked or oversold."
Callinan doesn't sugar-coat the risks of investing in emerging market growth companies, however, and he's quick to point out the obstacles: The market can be illiquid, prices on these kinds of stocks can swing widely, and taking or attaining a sizable position in a stock can be tricky business. But Callinan understands that turning negatives into positives is what makes his business tick. And if you find a company like Yahoo!--one that starts out small-cap and ends up bigger than most stocks that make up the Dow--it can make your fund a winner.
With about 150 companies in the fund's portfolio, all under $1.5 billion in market capitalization when initially purchased, the companies that catch Callinan's eye are those with earnings expectations of more than 20 percent per year, financial strength, a proprietary product or element, and an aggressive management that's capable of producing exceptional results. Re-search In Motion, a manufacturer of an innovative, wireless two-way pager device, is an example of one such company.
While growth is one thing that attracts Callinan to a company, quality does, too. Take Four Seasons, for example. This premiere hotelier is in the portfolio because it meets most of Callinan's criteria: It fits the market cap parameters, is what he considers undervalued, is growing at 20-plus percent per year, and has a strong brand name and great recognition. He's even held on to it despite its price volatility over the past few years.
Because of its dash, this fund isn't for everyone. Even Callinan admits it's a volatile fund and best suited for people with long-term investment goals who aren't looking for a tax-efficient fund.
Dian Vujovich is a nationally syndicated mutual fund columnist and author of 101 Mutual Fund FAQs (Chandler House Press). For free educational mutual fund information, visit her Web site, http://www.diansfundfreebies.com.
At A Glance
Fund Name: RS Emerging Growth Fund (RSEGX)
Managed By: RS Investment Management
Portfolio Manager: Jim Callinan
Total Assets: $1.39 billion
Top Holdings: EchoStar Communications, Emmis Communications, Netopia, Network Solutions and RealNetworks Inc.
Average Annual Return: 25.4% (since its inception in 1987)
Maximum Load: none
Total Expense Ratio: 1.47% (including 12b-1 fees of 0.25%)
Minimum Initial Investment: $5,000 ($1,000 for retirement accounts)
Management Fee: 1%
Phone: (800) 624-8025
Figures are as of September 30, 1999.