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Mutual Funds

A Star of the '90s Rebounds

After six disappointing years, small-company specialist Warren Isabelle appears to have righted his ship.

When Warren Isabelle opened Ironwood Isabelle Small Company Stock nine years ago, investors had cause to cheer. They could now buy a no-load fund run by a manager who had produced sterling results at the helm of Pioneer Capital Growth, a fund that levied sales fees. Isabelle didn't disappoint -- at least not at the outset. In 1999, the fund's first full year, it gained a rousing 49%.

But the next six years were lean. Although Ironwood made money in five of them (including the down years of 2000 and 2001), it wasn't the kind of performance that earned Isabelle bragging rights. In fact, Ironwood regularly trailed its peers -- funds that focus on small, bargain-priced companies.


Now, Isabelle appears to have righted the ship. Last year, his fund gained 24%, about seven percentage points better than the average small-company value fund. Key to the improvement, says Isabelle, was his decision a couple of years ago to slash the number of holdings, from 80 to about 40. The move allowed him and his two stock-picking colleagues to analyze companies more effectively, he says. "In my case, less is more." (He adds that Ironwood often doesn't move in sync with other small-company value funds because he tends to hold relatively few financial stocks.)

Isabelle takes the fund's small-company mandate seriously. Doing so is made easier by the fund's tiny asset base of $46 million. Some 60% of assets are in "micro caps," the smallest of small companies. Beyond the small-company focus, Isabelle selects stocks using an eclectic approach that's part science, part art. Like many bargain hunters, he uses computers to screen for cheap stocks. He becomes particularly intrigued when he sees company insiders buying shares of a depressed stock.


As far as the art side is concerned, Isabelle looks for "anomalies," which he defines as situations that cause a stock to be pummeled unfairly. For example, he says, shares of otherwise good companies ensnared in the stock-options backdating scandal "have been thrown out with the bath water." Isabelle makes no big-picture predictions and assembles his portfolio stock by stock. At nearly one-fourth of assets, basic-materials companies are the fund's biggest sector.

Ironwood's long-term results are not particularly impressive. From the fund's inception in March 1998 to February 1, it gained 9% annualized, an average of one percentage point per year less than the typical small-company value fund. The annual expense ratio, at 1.95%, is high, although Isabelle says it would drop below 1.5% if the fund's assets hit $200 million.

If you go just by the long-term performance numbers, you'll probably pass on this fund. But Ironwood Isabelle (symbol IZZYX; 800-472-6114) is still worth considering, given the dearth of good small-company funds, the manager's experience, recent performance and the fund's smallness.

Isabelle favorites: Small, obscure bargains

In the 1990s, says Warren Isabelle, Danka Business Systems (symbol DANKY) went on a "wacko acquisition binge and got indigestion." Danka has sold off its European operations, pared debt and brought in a turnaround specialist to run the firm. And the stock's market value of $100 million is a mere 10% of annual sales.


Novavax (NVAX) is a biotech company that specializes in vaccines. It's been getting attention for a proposed bird-flu vaccine, but Isabelle says Novavax's "unique" technology is also relevant for many other drugs. Recent developments have cut the stock's risk, he says.

A $22 stock in 1998, Westaff (WSTF), a provider of temporary jobs, now trades for about $5 and has a market value of just $80 million. New management and a robust jobs picture should boost the stock. "It's not impossible" for it to "double within a year," says Isabelle.