Thriving on the Edge

Barry is in his element with tiny companies

Thomas Barry is a daredevil. He's just as confident assessing risk from behind a computer screen full of stocks as he was from the cockpit of a fighter jet. "I love excitement," says the 58-year-old retired Naval fighter pilot and expert, black-diamond skier who runs the Bjurman, Barry Micro-Cap Growth Fund (BMCFX ). "I thrive on being on the edge."

As a specialist in micro-cap stocks, Barry is in his element. Considered the diciest part of the market, these tiny companies get sparse coverage on Wall Street and often rely on a few customers for their fortunes. "It's the most misunderstood sector," says Barry. "And it's where a manager can add value." That's what he has done: Barry's return over the past five years is an annualized 20.5%. The average small-cap growth fund in that period broke even.

His targets are companies with market capitalizations of $30 million to $300 million, and he looks for ones that are likely to have well above-average earnings growth. He starts selling winners as their market caps hit $1 billion and is entirely out of them by $1.7 billion. During the boom, that discipline forced him to sell into a rising market. In 1999, the fund's best year, he earned 53% -- but was only a middle-of-the-pack performer.

Barry is quick to cut losses. If a stock falls 15% from its recent high or the fund's cost, it's likely to be sold. That limits the downside. True, the fund lost 17.5% in 2002, but the average small-cap fund dropped 28.4%.

Since late last year, Barry has been buying tech stocks, and they now make up 30% of assets. He's not forecasting a recovery for the sector. It's just that "tech stocks look very, very good on our models," he says. Among his recent acquisitions: Neoware Systems (NWRE ), an Internet-based software developer, and OmniVision Technologies (OVTI ), which makes imaging devices for chipmakers. These stocks contribute to the fund's median earnings growth rate of 65%. At the same time, the stocks sell at an average 22 times next year's earnings. "If the stock grows at half the average of our portfolio, earnings will quadruple in five years," he says.

Good performance is testing the size limits of the $370 million fund. Barry says he may close it to new investors when it reaches $400 million. The good news: He has plans for a small-cap fund into which his micro-cap winners can graduate.

By Mara Der Hovanesian

    Before it's here, it's on the Bloomberg Terminal.