Hard Lesson

As manager of Govett Smaller Companies Fund, Garrett Van Wagoner tallied an annual return of better than 51% from 1992 to 1995. He then founded the Van Wagoner Emerging Growth Fund. After a solid 1996, it plunged more than 20% in 1997, even as the broad market jumped more than 33%. Van Wagoner says he failed to understand how punishing the small-cap market could be. Take Avant! Corp., an engineering-software maker and long one of his largest holdings. Despite an order backlog, it fell 40% after a competitor charged it stole products--an allegation the company denies.

Chastened, Van Wagoner vows to diversify better by holding around 115 stocks. He had pared the portfolio from 100 to 65 issues after the tech-stock plunge, but now sees that move as "a complete misjudgment." Avant! remains in the fund because he thinks profits will swiftly rise, though its legal woes may take years to resolve. The $275 million flagship fund also owns CHS Electronics, a distributor of computer gear; hospital software maker HBO; and Global Industries, a builder of ocean oil rigs.

Emerging Growth is up 7.9% through Jun. 5, better than average but still an also-ran. Says Van Wagoner: "Our results have gotten substantially better, and I hope that's a trend. Believe me."

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