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A Little-Known Fund Gem

Paradigm Value is a top performer that keeps a low profile.

You've probably heard of the American Funds, which has just overtaken Vanguard as the largest fund company in the land, based on assets under management. You're also likely familiar with Fidelity and T. Rowe Price. And if you didn't know American Century before, you probably do now -- thanks to its recent ad campaign featuring Lance Armstrong.

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But it's doubtful that you've ever heard of Paradigm Capital Management. It just so happens that this Albany, N.Y., firm's Paradigm Value fund is the fifth-best performer among U.S. diversified stock funds over the past three years. The fund (symbol PVFAX; 877-593-8637), which invests in small companies selling at bargain prices, returned an annualized 35% over the three years ending March 26, according to Morningstar. Its assets stand at a miniscule $40 million.

Just as some funds push for the spotlight, others, like Paradigm, choose to remain in the shadows. The fund's adviser mainly manages money for pensions, endowments and wealthy individuals. John Walthausen, senior vice president of Paradigm Capital, has managed the fund since its launch in December 2002. "We started the fund for friends and family and haven't gone out of our way to make ourselves known," he says. With the help of three analysts, Walthausen searches for companies that are "not well researched or well understood" by Wall Street. He also likes businesses that produce new and innovative products, and those with improving cash flow and solid management teams. "Frankly we're just looking to be a good, solid player in the long term," says Walthausen. "This isn't a shoot-out-the-lights fund -- our aim is to get a good return for shareholders, myself and our other employees."

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Paradigm's portfolio, which contains 66 stocks, is heavy on industrial materials and consumer services. The fund also has a 25% stake in business services. In that sector, Walthausen likes Cadmus Communications (CDMS), a Richmond, Va., printing company that has done "an extraordinary job integrating with the Web," says Walthausen. The company publishes and distributes books, trade magazines, and scientific and medical journals.

Paradigm's top holding is Foster Wheeler (FWLT), an engineering and construction company that accounts for 6% of the portfolio. "The mix of petroleum out there has deteriorated, so the more sophisticated refineries like Foster Wheeler are benefiting," he says. Another favorite holding is CSS Industries (CSS), which produces and distributes gift wrap, ribbons and holiday cards. "Their products are simple to make but very bulky and very seasonal," says Walthausen. "But this company is good at logistics, and they're making acquisitions and paying the right price for them."

Paradigm does not levy any sales charges, but annual operating fees are steep at 2.06%. That is well above the 1.54% average expense ratio for small-company value funds. The initial minimum investment requirement is $10,000.

--Katy Marquardt

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