Quick Take: Daniel Coleman, manager of WM Mid Cap Stock/A (WMCAX), invests in companies with market caps of $1 billion to $10 billion. Companies of that size tend to be more seasoned and less risky than small caps, but “they’re not so big that they can’t grow for a number of years,” he says.

In trawling for medium sized companies, Coleman looks for those with growing earnings whose shares have gotten pressured because of some condition that he considers transient.

Coleman’s fund, with total assets of about $79 million, was the top performer among mid-cap value funds in the second quarter this year, returning 4.7%, versus 1.3% for its peers. So far this year through June, the WM fund gained 7.8%, versus a 6.4% rise for its peer group. For the three years ended in June, WM Mid Cap returned an annualized 6.7%, while similar funds rose 8.1%.

The Full Interview:

Daniel Coleman doesn’t make big sector bets in running the WM Mid Cap Stock Fund, and he limits each individual stock to about 2% of its assets.

Positions of that size “create enough bang for the buck” in a given industry, while focusing the portfolio on around 50 stocks facilitates research, he says. That number is not so great “that one person can’t look at them and have a good handle on what the companies are doing,” says Coleman, who works with a team of five analysts.

In picking stocks, Coleman looks for fundamentally sound companies whose stocks have gotten beaten down for what he judges to be only a temporary problem.

He leans towards businesses with bottom lines that are growing as rapidly or faster than the overall economy, and whose shares are inexpensive compared to things like the company’s earnings or book value. Good returns on equity and invested capital, strong balance sheets and cash flow, and low debt are on his check list, too. Beyond that, he likes to see a competitive advantage, like a unique product or a patent. Coleman hunts among companies with market caps of $1 billion to $10 billion.

A typical investment for the fund, Coleman says, is Mandalay Resort Group (MBG) a hotel and casino operator he bought about a year ago. At that time, the fund manager expected a convention center that the company was opening in Las Vegas to boost its gaming and food revenues, and, consequently, its profits. Mandalay’s share price was depressed, however, because people were fearful of the industry’s prospects, Coleman says.

Gaming companies have since perked up along with the economy, however, and Coleman’s wager on Mandalay is poised to pay off. In June, the company agreed to be acquired by MGM MIRAGE (MGG) for cash.

The fund’s No. 1 holding at the end of the second quarter was clothing, footwear and accessories maker Jones Apparel Group (JNY), which Coleman likes because of its ability to grow by acquiring and integrating smaller rivals.

Behind Jones in the portfolio on June 30 was insurer HCC Insurance Hldgs (HCC). Coleman says the company stands out for its knack for entering in businesses that competitors shun, enabling it to increase charges for coverage and to gain market share, leaving it well positioned when the lines become popular again.

The stock itself is attractively priced at about 12-13 times earnings, Coleman says. In addition, the company is not widely followed by Wall Street, according to Coleman. While he does not look for companies that go largely untracked by analysts, Coleman says he likes them because they can take off when brokerage houses begin recommending them.

A pair of retailers, Neiman-Marcus Group`A` (NMG.A) and Tiffany & Co (TIF), were among the fund’s top holdings at the end of the second quarter.

Although Neiman-Marcus’s earnings have been growing by more than 50%, and Coleman expects them to continue increasing, its shares trade at only about 13 times projected earnings, which Coleman thinks is too low. The money manager adds that he envisions Neiman-Marcus prospering regardless of how the economy performs because many other store chains have abandoned the luxury products it concentrates on.

Tiffany features a market multiple, even though it generally grows faster than the overall economy, Coleman says. The company originally became appealing to him about two years ago, when it began expanding its product lines and opening new stores, he says.

Rounding out the fund’s top five stocks at mid-year was Microchip Technology (MCHP), a maker of specialized semiconductors that Coleman says he is drawn to because of its large market share in the areas it serves.

The fund, Coleman says, got strong contributions in the second quarter from chemicals maker Cabot Corp (CBT) and Lincoln Electric Hldgs (LECO), which, through subsidiaries, manufactures welding and cutting products. Both stocks appreciated by more than 20%, he says.

The portfolio, which was launched in February, 2000, has been less volatile than its mid-cap value fund peers, and has kept turnover lower than them. Total expenses for the fund run at 1.16%, versus 1.47% for its peers.

Contact Robert F. Keane with questions or comments at: bkeane@investmentadvisor.com.