Regional Road Maps Guide Some Mutual Funds to Profit
Some folks may just see trees, rugged mountain ranges, and a few famous companies like Boeing and Microsoft. But when Lacy Herrmann looks at the Pacific Northwest, he sees "Cascadia," a mythical but geographically linked land region stretching from Nevada all the way north to Alaska.
If Cascadia were a separate country, Mr. Herrmann enthuses, it would be an economic giant in its own right.
Between the late 1980s and 1994, Herrmann says, the seven state region of Oregon, Washington, Utah, Idaho, Nevada, Alaska, and Hawaii had a growth rate that exceeded that of the entire United States, as well as parts of Asia, Europe, Latin America, and the Middle East. Little surprise then, that Herrmann, who is chairman of the Aquila family of mutual funds, based here in New York, launched a new equity mutual fund this summer focused on the Pacific Northwest.
Welcome to the esoteric world of regional stock funds. Little-known except, perhaps, to a few aficionados, regional funds can be found throughout the US. Exactly how many of these specialized funds exist is somewhat uncertain, says Kevin Kresnicka, an analyst at Morningstar Inc., a Chicago financial information firm. Mr. Kresnicka reckons that there are at least a dozen established funds. The premise behind the funds, he says, is sort of a variation of the old adage: "support your school." Instead, he says, the funds are saying, "support your region."
Doing so through a mutual fund may be rather unorthodox, but it can be rewarding, experts say. The Franklin California Growth Fund, for example, has more than $110 million in assets and requires a minimum investment of only $100. The fund, (with a 4.5 percent load, or up-front, charge), has also been "a solid" performer, Kresnicka says. The fund is up 19.7 percent for 1996, through Sept. 30.
"Some people ask us if we're limiting ourselves by having a portfolio of California companies, but then I remind them that California has 1,300 publicly traded companies," says Conrad Herrmann, senior manager of the Franklin California Growth Fund (and son of Aquila's Lacy Herrmann).
"Franklin Templeton is based here in California, so it made a lot of sense for us to leverage off our own expertise, to invest close to home," Conrad Herrmann says. Roughly one-third of the fund's portfolio is in the technology sector; the rest is highly diversified.
Regional funds, whether established by national fund families, such as Franklin and Aquila, or local companies, tend to use locally based portfolio managers.
Aquila spent two years researching a Pacific Northwest equity fund before establishing its Cascadia Equity Fund, Lacy Herrmann says. The portfolio is managed in Portland, Ore., by Ferguson, Wellman, Rudd, Purdy & Van Winkle Inc., a firm with more than $1 billion under management for individual and institutional clients. The fund has a $1,000 entry fee, 4.5 percent load, and can be purchased through brokers and financial planners (888-322-7223).
Aquila has used the same approach with its other regional stock fund, the Rocky Mountain Equity Fund (800-762-5955). The Rocky Mountain fund is two years old, and focuses on companies in Colorado, Arizona, Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming. The investment adviser to the load fund is KPM Investment Management Inc. in Denver, a subsidiary of the Mutual of Omaha Company. The Rocky Mountain fund is up 12.5 percent this year. (Aquila's fund family also includes seven single-state municipal-bond funds.)
Other regional funds include IAI Regional Fund (800-945-3863), a no-load fund in Minneapolis with a portfolio of Midwest firms (up 9.2 percent this year); Composite Northwest (800-543-8072), a Seattle-based load fund that focuses on Pacific Northwest firms (up 14 percent for the 12-months that ended Aug. 31); and Homestate Pennsylvania Growth Fund (800-232-0224), a load fund in Lancaster, Pa., that invests primarily in Pennsylvania companies.
Homestate, with a $500 minimum entry fee, has a five-star rating from Morningstar. "We look for small to mid-sized companies ignored by Wall Street," says fund president Scott Rehr. The fund is up about 15 percent this year.
Still, analysts recommend that special care is in order when buying into a regional fund. The funds mirror both the upside growth potential of local economies and their potential downside. Texas, in the 1970s and 1980s, was the case study of a once-booming economy suddenly soured by turmoil in energy markets, Kresnicka says. New England in the late 1980s and early 1990s, was challenged by problems in technology.
When considering a regional fund, experts say, ask:
*Is the fund diversified enough to withstand a regional downturn?
*Does the fund have a solid cash position, in case there are sudden redemptions?
*What is the track record of the advisory management company?