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HEARTLAND SURGES AFTER BECOMING NO-LOAD

There has been a recent trend for funds to change their fee structure to no-load, and its no wonder when you can see the success stories of funds that have changed to no-load in the past year, like the Heartland group of funds.

Heartland has done so well since they went no-load last June that the group's highly regarded small cap fund, Heartland Value, is planning on closing by July 1, and perhaps even earlier. When Heartland became no-load, its assets were at roughly $250 million, and now, less than a year later, assets are close to $800 million. This rapid growth has resulted in the need to close the fund.Changing to no-load, however, isn't the only reason for this fund's success. Heartland Value's portfolio managers Bill Nasgovitz and Hugh Denison are two of the best micro cap stock pickers around. They look for companies with market capitalization between six and $400 million. Heartland Value's portfolio has a median market capitalization of $60 million, while the average small-cap stock fund is defined as having $100 million to $500 million in market capitalization.

This puts Heartland Value, as well as a handful of other funds like Evergreen Limited Market, Babson Shadow Stock and Babson Enterprise, in a different group from the traditional small-cap funds. It's a group called micro-cap stock funds where the median market-cap is in the range of five to $100 million.

In addition to looking for micro-cap stocks, Nasgovitz and Denison are also looking for a stock with a price earnings multiple that is lower than the market. Other deciding factors are that the company must have cash flow higher than earnings per share, long-term debt less than 25 percent of total capitalization, and high insider ownership. Nasgovitz strongly believes in the importance of inside ownership; he himself holds roughly $2 million in the Heartland Value fund.

It has been a profitable choice for Nasgovitz and all of Heartland's shareholders who have stuck out what can be a wild ride when investing in small company stocks. Heartland Value, like all small-cap funds, has had its fair share of peaks and troughs over the years but has managed to end every year since 1990 with a positive return.

Heartland Value is on its way to stellar performance in 1995, as well. With a strong rally that started on Dec. 9, 1994, Heartland Value has gained 17.29 percent as of April 13 and shows no signs of slowing down.

Many people predict small cap funds to do extremely well in 1995, as talk of a capital gains tax cut is predicted to help small-cap companies more than any other stocks. Satya Pradhuman, senior quantitative analyst an Merrill Lynch, was quoted in The Wall Street Journal as saying, "Our research shows that when the capital gains tax is reduced, smaller stocks tend to outperform larger stocks."

Heartland's move to no-load was cheered by myself and the thousands of independent investors who don't need a commissioned broker to sell them what they already know they want. It was, however jeered by the brokers who no longer get a commission from selling it.

That may not be the case for long, however. The SEC commissioned a study a year ago to find ways to reduce conflicts of interest between brokers and their clients. SEC Chairman Arthur Levitt was recently quoted in Investors Business Daily as saying, "I have long been concerned that the industry's compensation practices may exaggerate the conflicts of interest between a broker and an investor - conflicts that may ultimately compromise the advice an investor receives."

The report recommended that broker compensation should be tied to the number and size of the accounts they open, and after a two-or three-year period compensation should be based on performance.

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ADDITIONAL INFORMATION

How Heartland, index compare

Performance YTD 1994 1993 1992 1991 1990 1989

Heartland Value 10.7 1.7 18.8 42.5 49.4 -17.1 6.6

Small-Cap Index 6.65 -.8 21.0 13.2 44.7 -10.9 25.5

Source: Donoghue OnLine 800-982-2455