If any single entity could embody the success of the mutual fund industry in the 1990s, Gary Pilgrim's PBHG Growth Fund would serve as a pretty good case study.
The fund, based in Wayne, Pa., has grown explosively in the past couple of years on the heels of some dramatic performance numbers and a switch to no-load status with the dropping of the fund's up-front sales charge.But in 1994, like many other funds, it has struggled through spells of market volatility just to break even.
The small growth stocks that are PBHG Growth's specialty "provide quite a bit of opportunity for both risk and reward," Pilgrim said in an interview.
"When enthusiasm is at its highest, you get a lot of sharp price moves. When things go wrong, a stock can quickly be down 30 percent.
"In a high-risk asset class like this, we're going to have a certain number of mistakes," he adds. "But our bet is that exceptional growth companies produce the opportunity for exceptional market returns."
The annual gains chalked up by PBHG Growth have been exceptional indeed - 51.63 percent in 1991, 28.51 percent in 1982 and 46.57 percent last year, as tallied by the Morningstar Mutual Funds service.
That helped swell the fund from less than $10 million in assets in the early 1990s to more than $600 million at last report. It now has two siblings in the PBHG family, one that invests in very small companies and another with an international portfolio.
This year, when a stock market selloff struck in the spring, PBHG Growth's investors got a taste of volatility in the other direction. The fund's net asset value took a drop of about 23 percent, though it has since recovered to show a loss of just over 1 percent for the year through late October.
Pilgrim says his fund, committed as it is to small growth investing, is bound to be exposed to interim market swings. "We do not profess that we take defensive measures," he says.
"We try to tell people to think in terms of at least five years. If people are nervous, they should keep enough in reserve to meet whatever their needs for stability."
PBHG Growth's portfolio of some 80 stocks, mostly traded in the Nasdaq market, has of late included such names as America Online and Electronic Arts in communications and entertainment technology; Michaels Stores in specialty retailing and an array of small health services companies.
"We like to keep the hopper full of likely candidates," Pilgrim says. "If they begin to falter, we sell them. We don't spend a lot of time forecasting, but we try to let the company's progress be our road map."
The fund's portfolio turnover rate is pretty high by most standards, fluctuating between one and two times the full value of the portfolio each year.
Pilgrim estimates that about half the stocks in the fund at the beginning of a year are likely to remain there 12 months later, with perhaps 25 percent surviving through a second year.
"In the early stages, you take kind of a cautious position in a stock," he says. "Then the position will build up as the company progresses and your confidence increases."
A company doesn't have to fail miserably to be cut from PBHG Growth's roster. "Maybe it just grows to a size or slows to a growth rate where it no longer fits," Pilgrim says.