Chuck Akre's eyes narrow a bit behind the round rims of his glasses. "Do you think I play the slots?" he asks, a little incredulously. "Do you know what the odds are?" Akre, manager of FBR Small Cap Value fund, knows the house will keep 8 to 12 cents for every dollar you spend on a one-armed bandit -- and he likes those odds. Which is why Penn National Gaming, a casino operator, accounts for 8% of the assets in Akre's fund, and has at times accounted for twice that much.

Akre may not play the slots himself, but he makes big bets, and lately the payoff has been enormous. For the 12 months to July 1, FBR Small Cap Value (FBRVX; 800-622-1386) is up more than 32%, making it the 17th-best performer among more than 6,000 diversified U.S. stock funds. And it ranks among the top 10% of funds specializing in small undervalued companies for the most recent month, one year and five years, reports Standard &Poor's.

Two faces

Interestingly, both Morningstar and Lipper call FBR Small Cap Value a growth-stock fund. It actually has elements of both investment disciplines, preferring fast-growing companies, but buying their shares at cheap prices. Companies in Akre's portfolio are looking at earnings growth of more than 30% a year, on average. But the average FBR stock trades at just 15 times prospective earnings.

Befitting its dual nature, the fund, launched in 1997, was once called FBR Small Cap Growth Value fund. "I have always said, value, growth -- you choose, because we haven't changed what we do by one centimeter," says Akre, a gentleman farmer who calls the shots for FBR Small Cap from Middleburg, Va., in genteel horse country.

So how do he and his two analysts find their stocks? They look for businesses with three attributes: First, a high (20%-plus) return on equity -- a measure of how effectively investors' money is put to work. Second, well-behaved, shareholder-oriented executives. Third, ample opportunities for a company to reinvest profits. Akre has found only 40 stocks that fit the bill, and his top ten holdings claim nearly half the fund's assets.

Markel, the fund's top holding, is a property-and-casualty insurer that recently traded at $262 a share. Akre sees the net value of the company's assets growing at a rate of $25 a share over the next year, mostly from investments. Trading at slightly more than ten times that, "it's a steal." Penn National Gaming owns a Charlestown, W.Va., racetrack and casino that's on its way to owning 3,500 slot machines. Remarks Akre: "On Saturday night, you have to stand in line to get in front of one." American Tower, Akre's number-three holding, is a major independent wireless-tower operator. The company nearly collapsed last year, and FBR scooped up shares for well under a dollar apiece. It recently traded at $9.55.

Price of success

FBR's recent results haven't gone unnoticed. Assets jumped from $50 million earlier this year to nearly $270 million. Some 35% of assets are in cash because opportunities have become scarce, Akre says. If money continues to pour in, he'll consider closing the fund to new shareholders.

Impressive recent results notwithstanding, this fund isn't for everyone. The concentrated portfolio and huge industry bets provide lots of opportunity for things to go wrong -- as they did in 2000, when its 9% loss dragged it to the bottom of its peer group. And the fund's 1.9% expense ratio is high compared with the 1.6% average. But if FBR Small Cap continues its roll, you'll be hearing a lot more about Chuck Akre -- bet on it.

--Reporter: Joan Goldwasser

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