Fund in Focus: FBR Small Cap Value Fund

Chuck Akre, manager since December 1996It Pa

May 22, 2003 -- Chuck Akre hates to let go of a winner. "We don't want to sell a terrific business just because it's been successful," says Akre, manager of FBR Small Cap Value Fund/A (FBRVX).

Akre likes to hold onto his successes because they're hard to find. "They aren't a dime a dozen," the manager says of the stocks that meet his criteria. "Picking one business at a time," Akre looks for companies with:

*A high return on equity, approaching 20%,

*Managements focusing on shareholders' interests, and

*Opportunities to reinvest excess profits back into their business or similar businesses.

Because few companies meet all of these characteristics, Akre's fund generally has an annual turnover of about 30%. And because of this shortage, the fund is concentrated, with generally about 35 holdings.

What kinds of stocks does Akre end up with? Usually, their businesses are protected as a result of a strong brand, legislation, or scarcity of competition. Akre points to the gaming industry as a key protected industry in the fund, since state governments restrict entry into the gaming industry to extract high taxes from gaming companies. Governments like gaming taxes, according to Akre, because "taxes on gaming taxes the willing" (gamblers) rather than unwilling taxpayers.

The fund's top ten holdings, which make up 46.1% of the portfolio as of March 31, include five gaming companies: Penn National Gaming (PENN), Multimedia Games (MGAM), Alliance Gaming (AGI), Shuffle Master (SHFL), and Scientific Games Cl`A` (SGMS).

While Akre has had success with these gaming companies, he says it's getting harder to find companies he likes. Even though the market is down from its highs of previous years, the manager feels "it's not dirt cheap." This scarcity of prime candidates is one reason for the fund's high cash position, currently about 32%. Akre says the cash position is also high because his $164-million fund has had sizeable inflows over the last six months. Akre won't tip his hand as to where he may put this cash, saying: "We'll keep investing that cash when we find appropriate investments."

These inflows aren't surprising in view of the fund's recent strengths. It was the best performing small-cap value fund over the one-year period through April, rising 7.3%, while its peers fell 18.0%. The fund's longer-term record is also sound. It is the seventh-best-performing small-cap value fund for the five-year period through April, gaining 8.5%, versus a 1.4% rise for its peers.

Other than his main criteria, Akre wouldn't point to any one reason for his success, but suggested a possible factor: "One thing that shouldn't be dismissed is about 14 months ago, we moved to a little town 40 miles west of Washington, D.C.," he said. Akre says feedback from brokerage firms is valuable, "but at the end of the day, we like this distance."

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