Ip Os: Going After The Hard To Get

This fund lets ordinary investors get in early on new offerings

Wish you had gotten in on some of this year's hottest new issues--companies such as United Parcel Service and Sycamore Networks? Most individuals have little opportunity to buy hot initial public offerings at the original price, since underwriters allocate those precious shares mainly to institutions. But owners of USAA Aggressive Growth have gotten a piece of those IPOs and many more. In no small part because of the torrid IPO market, the $1.3 billion fund is up 62% through Dec. 3.

As part of their strategy of investing in the fastest-growing companies, portfolio managers Eric Efron and John Cabell, based at USAA's San Antonio headquarters, like to buy into up-and-comers as early as possible and ride them as they become bigger names (table). Several companies they purchased at the offering price years ago, such as Network Solutions, are among the fund's top holdings and biggest winners. But USAA Aggressive Growth isn't just an IPO fund. Fewer than 50 of its 250 holdings have been public for under six months. An emphasis on technology, which makes up 42% of the fund, has helped returns, as has health care, which accounts for 18% of assets. Cabell, who handles health-care stocks, has emphasized biotech companies, such as MedImmune and IDEC Pharmaceuticals. He also covers retailing and financial services, while Efron handles telecom, media, and business services.

Both former analysts with about 20 years each of investing experience, Cabell and Efron do their own fundamental research to choose stocks. All holdings must have rapidly growing earnings--or the prospect of having them. But mainly they look for companies that take advantage of demographic or industry changes, supply new products and services, offer new computing power, or serve the telecom revolution.

THE RISKS. With a beta of 1.32, the fund's returns are about 30% more volatile than the Standard & Poor's 500-stock index. It also hasn't always performed so well--reasons why BUSINESS WEEK gives USAA Aggressive Growth only a C- rating when compared with all equity funds in our interactive Mutual Fund Scoreboard (www.businessweek.com/investor/). Indeed, from mid-1996 through 1997, total returns suffered as small-cap stocks fell out of favor and the market narrowed to reward only the largest companies. Efron and Cabell realized some of the fastest-growing companies were large caps and broadened the portfolio, which now includes Dell Computer and Microsoft. In 1998, returns headed back up as big-cap names continued to outperform while some smaller, riskier stocks took off. Most stocks in the fund are in the small- to mid-cap range, but Efron and Cabell maintain some fast-growing large companies for stability.

The fund's diversification across industries and market caps shields investors from damage done by a stock or industry that implodes or a market shift that favors one size company over another. However, USAA Aggressive Growth adheres to one investment style. If interest rates rise further and the market stops rewarding fast-growth stocks with high price-earnings ratios, the fund will take a beating.

For investors who want to allocate a portion of their assets to a high-risk, high-return strategy, the fund boasts a low expense ratio of 0.72%, vs. the 2% or more charged by many of its peers. For the relatively low fee, you get experienced managers, a broad crop of high-growth stocks, and access to new issues you would have a hard time buying on your own.

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