One way to run a mutual fund is to make a handful of big bets on stocks and hope for a few home runs. The funds that do that often make headlines when they win -- and lose. Nikolaos Monoyios and Mark Zavanelli take the opposite approach in Oppenheimer Main Street Small Cap Fund (OPMBX). With tiny positions in some 1,200 stocks, they're aiming for lots of base hits. For the 2001-05 period, they earned an average annual return of 12.7%, vs. 8.2% for the benchmark Russell 2000 index.
To keep tabs on so many stocks, Monoyios, 57, and Zavanelli, 35, use a quantitative model that collects massive amounts of data about the companies' and stocks' trading patterns, and they adjust their holdings as market conditions change. That means they might trade 300 stocks in a week. About 80% of the time, adjustments are made with "program trading" -- the buying or selling of a large basket of stocks.
Zavanelli has been running this small-cap fund for six years (Monoyios joined in 2003), but their quantitative model is a work in progress since factors that helped identify trends a year ago don't necessarily work now. "We believe in continuous improvement," Monoyios says.
If the model is positive about a stock, Zavanelli and Monoyios will increase its weighting vs. the Russell index. Likewise, they'll pare the position if their model cools on it. "Some people say it looks like an index fund," Zavanelli admits, but his partner quickly notes that the fund's returns far exceed the index. "There's no way anyone can accuse us of being an index fund."
Right now, the managers have upped the ante in technology and consumer discretionary sectors (such as retailing, restaurants, and entertainment) and are underplaying financial and health-care stocks. They have also cut the portion of the fund in the smallest stocks, known as micro-caps, and boosted mid-caps, given their view that the outsize gains of small stocks over the past six years can't go on much longer.
"We try not to fall in love with stocks or become overconfident," says Monoyios, "because something very bad could happen." Something like a long string of strikeouts.