Thinking Small Brings Big Results

Average annual returns of 62% make microcap specialist Fleming Frontier a huge winner

When Fleming Frontier European Discovery Fund opened in 1995, high-growth investing meant buying Irish construction companies or niche engineering companies in Germany. But with the Internet and mobile telephony exploding, that's changing. And no one is more excited about Europe's New Economy than the fund's manager, Jim Campbell, a 33-year-old Scot. "In the past year, a wave of entrepreneurism has swept the Continent, creating a lot of exciting companies," he says. "The opportunity is greater than ever."

Campbell's track record bears that out. For its first three years, Fleming Frontier's average return was around 35%--good, but a fraction of last year's 200%. The fund's five-year average of 62% makes it the No. 1 European offshore fund for the same period, according to Standard & Poor's Micropal. The fund gained 54% in this year's first quarter--the best performance of the 500 offshore funds S&P Micropal tracks for Business Week.

What's its secret? Campbell and co-manager Francesco Conte think small. "It's the only fund in Europe focusing on microcap stocks," says Conte, 33, who was born in Sicily and grew up in London. Companies with market capitalizations ranging from $100 million to $300 million offer exceptional growth at a fraction of the cost of blue chips. And they're often overlooked by big investors, he says.

NO FLAKES. Campbell and Conte say Europe's small caps will be among the hottest investments in the coming year. For one thing, economic growth is likely to remain strong. For another, Europe's commitment to the New Economy model is strengthening. Europe is catching up with the U.S. in terms of Internet usage. In emerging technologies such as wireless application protocol, which provides high-speed Net access via mobile phones or handheld devices, the Euros have an early lead. As to the technology sector's recent volatility, the managers think it will hasten the industry's maturity. "The market hype will evaporate," says Campbell, "but investor interest and capital for good companies is here to stay."

Telecom and tech companies account for around 80% of the portfolio. A recent favorite is France's SR Teleperformance, Europe's largest call center, which provides automated customer service for a range of industries. Because it's well-managed, expanding in the U.S., and revenues are growing at 30% a year, Conte thinks the stock is still undervalued at 70 times this year's estimated earnings. "These stocks may look expensive," he says. "But they're growing so fast that in six six months from now they'll look cheap."

Campbell and Conte's fund may favor tech stocks--but it steers clear of dot-coms. "So many dot-coms have really flaky business models," says Conte. Instead, the fund focuses on companies that provide products or services for Net businesses. Sweden's Framtidsfabriken is Europe's top Internet consultancy; in the eight months since the fund bought in, the return has been around 700%.

Legwork is important. Campbell and Conte spend most of their time on company visits and get some of their best ideas from local brokers. A French broker suggested Consodata, a Paris direct marketer. Consodata is Europe's only listed company in the business, and sales are growing at more than 35% a year. The stock has zoomed 327% since the fund bought it in October.

Campbell and Conte's knack for spotting well-priced high-growth companies is what makes their fund successful. "We've been doing this for five years, and no one has copied it yet," Campbell says with the barest hint of amazement. But you just know that won't be true much longer.

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