A patented methodology helps this eight-year-old fund identify standouts in any industry. By Anne Kates Smith, Executive Editor June 30, 2007 Gerry Sullivan, 46, runs Industry Leaders, an undiscovered fund with just $25 million in assets, but a five-year annualized return of 10% -- better than that of the overall market. We asked him about his investing approach. KIPLINGER'S: Why focus on industry leaders? SULLIVAN: Leadership perpetuates leadership. Big companies remain big. They have the ability to do new business, to expand and to develop new products. How is your index fund different? Here's an analogy: When my daughters were little, we went to the racetrack. They asked, "Why don't you bet on all the horses? Then you'd be sure to win." Well, if I bet in line with the odds on each horse, that would work the same as an S&P 500 index fund -- that's the market bet, not the best bet. If I knew what the owners bet on their horses, it would be like looking at what companies bet on themselves. They know their business better than the market does. How do you find what they're betting? I look for common shareholders' equity. It's the closest thing to book value, or the net value of a company's assets, that you can capture with a computer program. It measures what investors put into a company and how much of its earnings the company keeps to put back in the business -- in effect, what the company is betting on itself. I also look for a credit rating of A or better to determine quality. Advertisement What do you end up with? Currently, we capture 55 industries, represented by 78 companies. We have no railroad, natural-gas or wireless-networking stocks, but we own two software companies and five financial-services stocks. How has the mix changed lately? Most recently we put Paccar in the portfolio -- we hadn't had any auto or truck stocks in three or four years. Earlier this year, Deere replaced Caterpillar. Caterpillar had been in the fund since day one -- I had an emotional attachment to their yellow trucks. Now I look for green.