Better Know a Stock Picker

Welcome, Fools, to part 54 of our several-thousand-part series, "Better Know a Stock Picker," which is loosely, but not too loosely, based on Stephen Colbert's "Better Know a District" from The Colbert Report.

Like Stephen and his thorough investigations into America's congressional districts, each week I take a look at a fund you may want to own. What's on tap this week?

Rainier Small/Mid Cap Equity (RIMSX)

Expense ratio

1.18%

Fund size

$3.4 billion

1-year return

27.6%

5-year return

20.2%

10-year return

11.3%

Sources: Rainier Investment Management; Morningstar. One- and five-year returns as of 8/22/07; 10-year return as of 7/31/07.

Top 5 stock holdings

Company

% of Assets

Noble (NYSE:NE)

2.98%

McDermott International (NYSE:MDR)

2.83%

Precision Castparts (NYSE:PCP)

2.81%

Sotheby's (NYSE:BID)

2.10%

General Cable (NYSE:BGC)

1.91%

Source: Rainier Investment Management. As of 6/30/07.

Meet Jim Margard
The fightin' team at Rainier Small/Mid Cap Equity is led by Jim Margard, who has been on the job since the fund opened for business in May 1994. Margard is also Rainier's chief investment officer.

And he's earned the title. Rainier Small/Mid Cap Equity has returned more than 15% annually in its 13 years of existence. Few investors not named Buffett, Munger, or Lynch have produced such superstantial performance.

Give credit to a focus on simplicity. While the rest of Wall Street takes to spreadsheets like a cow takes to grass, Margard and his five co-conspirators at Rainier Small/Mid-Cap carefully study economic trends. The goal? To invest in proven stocks with catalyst-driven growth prospects. "A lot of our names have developed leadership in strong niches," Margard told Investor's Business Daily in 2005.

How he invests
But not all growth stocks will do. Only superior franchises interest Margard and his team. "Companies that have integrity in their balance sheet, are able to compete effectively, and participate in areas of the market with strong demand are likely to have relatively high earnings-growth rates, and those stocks tend to go up. It's as simple as that," Margard recently told the editors of Louis Rukeyser's Wall Street newsletter.

Margard's aim is to buy the best businesses as cheaply as possible. To do so, Margard told the Rukeyser's editors, his team examines the past 20 quarters of stock performance for each prospect. The goal? Determine the normal trading and valuation range. Margard always seeks to buy at the very low end of the range.

Video-game maker Activision (Nasdaq: ATVI  ) offers an interesting example. Though the fund no longer owns shares, Margard and team spotted a discount when the stock went for around $13 in October 2004. Today, it's trading above $18.

More often, Margard holds or adds to winners. McDermott, which creates and services infrastructure for energy production, may be the best example. The stock is up nearly 80% over the past year, yet Margard won't sell.

"The stock has performed well, but we believe it's still reasonably priced because the earnings and revenue expectations have moved up in lockstep with the stock itself," Margard told the editors of Rukeyser's. Eat that, Wall Street.

Is this fund for you?
If there's a problem with Rainier Small/Mid Cap, it's with fees. Don't get me wrong -- a 1.18% expense ratio is perfectly reasonable for a fund that's performed as well as Rainier has. My problem is that while it's closed to new investors, Rainier still charges a 0.25% 12b-1 fee for marketing expenses. That's shameful. (Here's why.)

In all other respects, though, Rainier is a proven market-beater and would probably merit consideration for Shannon Zimmerman's Motley Fool Champion Funds portfolio, were it open to new investors.

Don't underestimate that last point. More than 79% of Shannon's picks for Champion Funds are beating their respective benchmarks. Sound intriguing? Here's how to get a no-strings-attached, 30-day free trial to the service.

And till next time, fund nation, good night.

For more Foolish coverage of mid-cap mavens:

  • Timothy Evnin's 20 years of cuddling up to mid-cap bargains has created super-sized returns.
  • Chris Bowen and Ryan Snow, on the other hand, seek America's Best Growth Companies.
  • Chris Alderson will invest anywhere, but he keeps risk in check by dedicating a quarter of his portfolio to mid-caps.

Activision is a Stock Advisor selection.

Fool contributor Tim Beyers is a regular viewer of The Colbert Report. (Stay the course.) Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Find Tim's portfolio here and his latest blog commentary here. The Motley Fool's disclosure policy is championship-caliber.


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