From the August 2004 issue of Investment Advisor • Subscribe!

August 1, 2004

Overseas, It Pays To Be Small

In a lackluster year for foreign equities, small-cap stocks have outperformed. Year-to-date through July 5, the MSCI EAFE Small-Cap Index rose 10.9%, while the broader MSCI EAFE Index gained just 2.4%. Among mutual funds investing in this sector, the Oppen-heimer International Small Company Fund (OSMAX) ranks as the second best performer for the year ended June 30, with an impressive 60.5% gain. The portfolio finished fourth in its class for the three-year period with a 20.1% annualized return.

Managed by Rohit Sah, the $292 million fund looks for companies below $2.5 billion in market cap that are believed to be entering into a growth cycle. Sah particularly likes stocks with high sales growth rates and high operating margins, as well as those in new or growing industries.

The fund has benefited from heavy exposure to the surging small-cap sector in the Far East. As of May 31, Sah had nearly 60% of his assets invested there, with 18% each in Japan and South Korea. The information technology and industrials sectors account for nearly 40% of the fund, including investments in such stocks as Korean online game software maker NCsoft Corp., British wireless data service provider iTouch plc, and Indian textile firm Arvind Mills Ltd.

The Driehaus International Discovery Fund (DRIDX) gained an annualized 18.9% for the five-year period, making it the best performing foreign small-cap portfolio. Lead managed by Emery R. Brewer, the $328 million fund can invest in both small- and mid-cap companies. Like the Oppenheimer fund, this offering also has heavy exposure to the Far East (46.5%, including 25.9% in Japan), although Western Europe is its largest single region (31.7%).

However, the fund also features a high expense ratio of 2.02%, versus 1.60% for its peer group, and an extremely high turnover rate of 515.8%, versus 88.9% for its peers.--Palash R. Ghosh

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