Rohit Sah of Oppenheimer International Small Company Fund

Quick Take: Foreign small-cap stocks enjoyed tremendous returns last year, so not surprisingly, Oppenheimer International Small Company Fund (OSMAX) flourished. The $267-million portfolio skyrocketed 94.0% for the 12-month period through January, while the average international equity fund gained 45.1%. For the three-year period, the fund rose 11.6%, annualized, versus a 2.8% drop by the peer group.

Manager Rohit Sah likes stocks with high sales growth and high operating margins. He also favors companies in new industries or industries undergoing widespread structural changes.

Over the past few years, the fund has been significantly overhauled. Formerly part of the fund’s four-member management team, Sah became the sole portfolio manager in January. Portfolio changes in recent years include cutting a high weighting in health care and boosting holdings in Japan.

While the fund has a somewhat higher beta and standard deviation than its peer group, its turnover has fallen noticeably in recent years. Turnover dropped from 280% in 1999, to a modest 53% last year owing to the fund’s management changes.

In October 2003, the fund’s S&P Ranking was upgraded to 5 stars from 3 stars.

The Full Interview

S&P: What kind of stocks do you look for?

SAH: We like companies with high sales growth and high operating margins. We also like companies in new industries, such as the wireless cell-phone data-services industry, which is forecast to grow very strongly.

We look for companies in industries undergoing significant structural change due to deregulation. For example, the global textile industry is poised for big changes because of commitments by Western Europe and the U.S. to phase out textile import quotas in 2005.

We screen for companies which will benefit from long-term growth trends and which can typically deliver annual sales growth of at least 15%. In addition, we look for companies with attractive operating margins and high returns on capital.

Our stock selection process is strictly bottom-up and includes company visits.

S&P: How do you define small-cap?

SAH: The fund’s prospectus defines small caps as below $2.5 billion in market cap. The median market cap of the fund is currently about $550 million. Once a company’s market cap reaches the $2.5-billion level, it automatically becomes a sell candidate. When we sell depends on whether we feel the stock has reached fair value.

S&P: Can you discuss the recent history of the fund’s management?

SAH: In January, I became the sole portfolio manager, but the fund’s investment objective didn’t change. Nick Horsley, the fund’s original manager, left Oppenheimer in 1999. At that time, the fund adopted a quantitative, model-driven portfolio using computers. That strategy failed because small-caps require bottom-up analysis, meeting with managements and qualitative judgments about sectors.

In December 2000, the fund was taken over by four managers — Frank Jennings, Rajiv Bhaman, George Evans and myself — each running 25% of the fund. Then, the portfolio was significantly overhauled. Subsequently, we fine-tuned the fund by reducing a high weighting in health-care stocks and adding to exposure in Japan.

S&P: How did you perform against your benchmark last year?

SAH: In 2003, the fund gained 85.1%, versus a 62.0% return by our benchmark, the MSCI World (ex-U.S.) Small Cap Index. Our performance came from holdings in all of our sector positions and most of our country weightings.

The fund was buoyed by significant exposure to Japan and India — these markets surged in 2003 — and holdings in the telecom services and Internet sectors. Of course, we were helped by the tailwinds of the global bull market, which was particularly helpful for international small-cap stocks.

S&P: What are your largest holdings?