Kevin O'Boyle is pumped. Twenty months after quitting as co-manager of Meridian Value, where he helped compile an exceptional record, O'Boyle has launched his own mutual fund. "I'm thrilled to be back," he says. "I'm running my own business, and I'm more in control of my own destiny than ever before."

O'Boyle's new Presidio fund might get your adrenaline flowing, too. Why? Because it gives you the services of a proven manager at the helm of a fund that contains hardly any assets. With just $8.5 million in cash, Presidio is so small that it doesn't even have a ticker symbol. By contrast, Meridian Value had ballooned to $1.5 billion by the time O'Boyle left -- and has grown to $2.3 billion today.

A tiny asset base and a talented manager can give new stock funds a fast break from the starting gate. In fact, new funds tend to beat their rivals handily in their first 12 months. What accounts for the new-fund edge? When funds are small, managers can focus on the relatively few companies that they like best. They can dart in and out of stocks, including those of tiny companies, without significantly pushing prices up when they buy and down when they sell.

A new fund isn't saddled with stocks that a manager probably wouldn't buy but still doesn't want to sell, perhaps because of tax consequences. Finally, managers of new funds really do get excited. Putting up good numbers early can be crucial in attracting new assets and in helping managers who work for large fund organizations keep their jobs. Eventually, of course, the new small fund becomes the mature large fund, and sometimes that's a signal to start the search all over again for a new fund.

You shouldn't buy just any new fund. Academic research shows that, over the short term, the new-fund effect is most pronounced among funds that specialize in stocks of small fast-growing companies. But we prospected for funds that you might want to hold longer than a year. We considered only funds with proven managers, such as O'Boyle, as well as funds sponsored by companies that have a good record with new offerings. The five potential winners that made the cut all hatched since last February (for the nuts and bolts on each fund, see the table on page 41).

Rebound seeker

Richard Aster, the talented manager of Meridian Growth fund, had a hunch. He noticed that the stock of a company that produced a good quarterly earnings report after experiencing several bad quarters would often soar in the succeeding 12 months. O'Boyle, then an analyst for Meridian Growth, ran the historical numbers on such companies, and the hypothesis held up. Aster launched Meridian Value in 1994, and O'Boyle became co-manager in mid 1995. During O'Boyle's eight and a half years as co-manager, before stepping down at the end of 2003, Meridian Value earned an annualized 22% -- more than twice the average return of funds that specialize in stocks of midsize companies. Over that period, it ranked sixth among all funds, according to Morningstar.

Although O'Boyle started from Aster's premise when he launched Presidio on May 3, he added some of his own refinements. O'Boyle will frequently buy a stock when analysts project that the company's earnings will fall for a third consecutive quarter (compared with the same quarter a year earlier) and long before its earnings actually begin to improve. "It's usually after the second bad quarter that a stock really starts to get hammered," says O'Boyle, 41.

There's nothing magical about the number of bad quarters a company experiences before O'Boyle pounces. After all, if a company is in trouble, its profits may deteriorate for years. O'Boyle tries to mitigate the risk of that scenario by sticking to financially strong companies that are market leaders and had previously demonstrated the ability to generate high profit margins. "Before I buy a stock, I try to assess what earnings will be in three years," he says.

Presidio comes with an important caveat: Aster isn't along for the ride. But O'Boyle is no novice, and he was the primary stock picker at Meridian Value. What's more, after taking a year off to travel and remodel his San Francisco house, he is totally focused on Presidio. "The fund has my undivided attention," says O'Boyle.

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