James Margard of Rainier Small/Mid-Cap Equity Fund

The fund's No. 1 stock currently is Joy Global Inc. (JOYG), a manufacturer of mining equipment, that Margard believes will benefit for the next few years from rising demand for coal. Joy Global's earnings will more than likely double in fiscal 2005, and grow by 30% the following year, Margard said. The stock remains reasonably priced, however, according to the manager. It's trading at about 19 times projected earnings in the current year and about 15.5 times projected earnings in fiscal 2006, he said.

Another of the fund's top stocks is Getty Images Inc. (GYI), which Margard likes because it's the leading provider of stock photography and images. He described the Seattle-based company as a "strong grower." Getty's earnings have topped estimates in each of the last seven quarters, and its revenues increased by about 21% in the first three months of this year, he said. Sales growth may ease next year, but it should stay in the mid-teen range next year, Margard said.

The company's results, he added, will be underpinned by its entry last year into Japan, the world's second-largest advertising market.

Getty Images, Joy Global and American Pharmaceutical were among the fund's biggest winners in 2004. The fund's returns were also helped by F5 Networks Inc. (FFIV), which makes software that lets companies manage Internet traffic; General Growth Properties Inc. (GGP), which owns and operates shopping centers; and Internet search company InfoSpace Inc. (INSP).

Although the managers focus on small and mid-sized companies, they won't automatically sell stocks that move into large-cap territory. They will, however, unload companies whose financial health looks like it may take a turn for the worse, or whose stocks become pricey.

Late last year the fund liquidated its stake in Sterling Financial Corp. (WA) (STSA), Margard said, because he and his colleagues feared the savings and loan holding company would be hurt by rising interest rates, and because they thought its share price had gotten "fairly extended."

"Their underlying fundamentals are okay," Margard said of Sterling. "But they're not getting any stronger."

The fund's turnover rate usually hovers around 130%, Margard said (it was 134.5% last year, compared to 64.4% for its peers.) About half of the turnover, or more, is a result of the managers trading within a position, rather than wholesale changes in the portfolio, he said.

To control risk, the managers keep the fund's sector weights in line with those of its benchmark, the Russell 2500 index, Margard said.

In addition, they avoid illiquid stocks, which they define as those with less than $2 million in daily trading volume. The team also shuns stocks it considers speculative. "We may, on occasion, own one or two of those," Margard said. "But it would be a pretty small weighting."

Contact Bob Keane with questions or comments at: [email protected].