The Kiplinger 25 Says Goodbye to Champlain

You still have a few more days to invest in Champlain Small Company before it closes to new investors October 15 -- and loses its spot in the Kiplinger 25 list of best no-load mutual funds.

That's right: We're saying goodbye to this superb fund. We added Champlain Small Company (CIPSX) this year to the ranks of the Kiplinger 25. Guided by Scott Brayman, Champlain has performed beautifully -- the fund is up 20% year to date through October 10. Alas, as with many of the best small-company, no-load mutual funds, this fine offering is shutting its doors to new money. (If you own Champlain shares, hold onto them or add to your position).

So we need to suggest some alternatives in the small-cap growth space. Here are two worthy substitutes for Champlain: Baron Small Cap (BSCFX) and Excelsior Small Cap (UMLCX).

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Cliff Greenberg has steered Baron Small Cap since inception in September 1997, returning an 12.5% annualized in the ten years to September 30, 2007. That's five points a year better than the benchmark Russell 2000 index over the decade, a lengthy period of management tenure by industry standards.

Greenberg says he looks for “one-off ideas,” by which he means he studies individual company situations carefully rather than thinking in index or sector terms when he invests. He seeks to compound earnings over the long haul and holds his stocks for an average of three years. He generally avoids technology and bio-tech stocks because it's harder to project the future of these. Instead, he prefers consumer businesses such as gaming, lodging and for-profit education, where he thinks he has a good feel for the future.

Baron Funds has an outstanding record making money in medium-sized companies, and Greenberg is able to tap into the firm’s strong research team.

For example, he recently added to his position in Emeritus (ESC), a leader in the assisted-living housing industry. He holds both Strayer Education (STRA) and Capella Education (CPLA), adult education outfits.

One of his best picks has been Intuitive Surgical (ISRG), which makes robotic surgical devices and disposable parts. This investment has soared 15-fold since 2003, says Greenberg, who gets to know the managements of portfolio companies well.

Excelsior, co-managed by Doug Pyle and Jennifer Byrne, returned an annualized 24% in the five years to October 10, 2007.

Pyle is a talented bottom-up stockpicker who pretty much ignores industry benchmarks and style boxes (in fact, he considers his fund a small-company blend rather than growth fund). He looks for companies with strong balance sheets and high returns on capital. He favors stocks that are temporarily beaten down and selling at discounts to historic multiples over five to ten years, which reduces investment risk. "One way to beat the market is by not losing in declining markets," he explains.

Excelsior is more concentrated than Greenberg's Baron Small Cap, 40 instead of 90 names, and has a similarly low turnover rate.

Pyle has hit a couple of home runs this year working on the theme of how to invest in tumultuous financial markets. His two largest holdings are FTI Consulting (FCN), a forensic accounting firm hired to pore over the books in bankruptcy proceedings, and GFI Group (GFIG), a niche financial services boutique whose main product is credit default swaps, derivatives used to insure fixed-income investments. FTI has vaulted 89% year to date through October 10 and GFI was up 43%. Little wonder that Excelsior Small Cap is up 21% so far this year.