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Foreign Fund Insight: The Driehaus Mystery

These aggressive funds have defied the odds.

Brian Portnoy, 05/01/2002

<SPAN class=v12666666content> <P>Here's a head-scratcher: Growth investing, especially the aggressive sort that searches for companies with earnings momentum, has been sorely out of favor abroad (just as it has been in the U.S.), yet some of the best-performing international-stock funds over the past year have used a pedal-to-the-metal growth strategy. What gives? /?></P> <P><SPAN class=v12666666content>The answer lies in the fact that many of these funds come from the same fund family: Driehaus. Four of the firm's five mutual funds--Driehaus Asia Pacific Growth <?XML:NAMESPACE PREFIX = MSTR /?><MSTR:SECURITY>DRAPX</MSTR:SECURITY>, Driehaus Emerging Markets Growth <MSTR:SECURITY>DREGX</MSTR:SECURITY>, Driehaus International Discovery <MSTR:SECURITY>DRIDX</MSTR:SECURITY>, and Driehaus European Opportunity <MSTR:SECURITY>DREOX</MSTR:SECURITY>--have posted competitive numbers through the market downturn and continue to do so in 2002. (Only Driehaus International Growth <MSTR:SECURITY>DRIGX</MSTR:SECURITY> has been a laggard.) /?></P> <P><SPAN class=v12666666content>The Chicago-based Driehaus fund family specializes in companies that are experiencing rapidly growing sales and profits. Accelerating revenues, positive earnings surprises, and new products or order backlogs that signal sustainable growth pique a Driehaus manager's interest. Technical factors, such as positive stock-price and trading-volume trends, are also part of the process. And valuations? Sorry, not a priority. /?></P> <P><SPAN class=v12666666content>It thus comes as no surprise that each of Driehaus' offerings shot the lights out in the late 1990s, when the market clearly rewarded such aggressive-growth investing. (International Discovery gained 213% in 1999, for example.) But this surely doesn't sound like a recipe for success over the past couple years when value-conscious funds have ruled the roost. Nonetheless, the Driehaus funds have held up relatively well. /?></P> <P><SPAN class=v12666666content> <TABLE cellSpacing="0" cellPadding="0" width=422 border="0" > <TD vAlign="bottom" align="left" bgColor="#999999" colSpan=6><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><B><FONT color="#ffffff" >  Driehaus Funds Have Defied the Odds</FONT></B></FONT></TD> <TD vAlign="bottom" align=right><IMG height=5 src="http://im.morningstar.com/im/dot_clear.gif" width=175></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=73></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=6></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=56></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=56></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=56></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><B><FONT color=#999999>Fund</FONT></B></FONT></TD> <TD vAlign="top" align=right> <DIV align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><B><FONT color=#999999>Category</FONT></B></FONT></DIV></TD> <TD vAlign="top" align=right> <P><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><B></B></FONT></P></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><B><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><B><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><B><FONT color=#999999>*YTD<BR>Return<BR>( % )</FONT></B></FONT></B></FONT></B></FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><B><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><B><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><B><FONT color=#999999>*12-Month<BR>Return</FONT></B></FONT><FONT color=#999999><BR>( % )</FONT></B></FONT></B></FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><B><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><B><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><B><FONT color=#999999>*3-Year<BR>Return<BR>( % )</FONT></B></FONT></B></FONT></B></FONT></TD> <TD vAlign="bottom" align="left" colSpan=6><IMG height=5 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <DIV align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >Div Pacific/Asia</FONT></DIV></TD> <TD align=right></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >11.6 ( 20 )</FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >0.6 ( 7 )</FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >18.9 ( 2 )</FONT></TD> <IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <DIV align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><FONT color=#000000>Div Emg Mkt </FONT></FONT></DIV></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ></FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><FONT color=#000000>14.3 ( 31 )</FONT></FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><FONT color=#000000>18.4 ( 9 )</FONT></FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >15.1 ( 3 )</FONT></TD> <IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <DIV align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><FONT color=#000000>Europe Stock </FONT></FONT></DIV></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ></FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><FONT color=#000000>6.6 ( 15 )</FONT></FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><FONT color=#000000>0.4 ( 12 )</FONT></FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >28.9 (2 )</FONT></TD> <IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <DIV align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><FONT color=#000000>Foreign Stock </FONT></FONT></DIV></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ></FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><FONT color=#000000>12.9 ( 19 )</FONT></FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><FONT color=#000000>7.9 ( 3 )</FONT></FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >32.9 ( 1 )</FONT></TD> <IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <DIV align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><FONT color=#000000>Foreign Stock </FONT></FONT></DIV></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ></FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><FONT color=#000000>-4.8 ( 95 )</FONT></FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><FONT color=#000000>-21.4 ( 95 )</FONT></FONT></TD> <TD align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-7.6 ( 83 )</FONT></TD> <IMG height=9 src="http://im.morningstar.com/im/422x9rule.gif" width=422></TD> <TD vAlign="bottom" align="left" colSpan=6> <P><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" >Data through 4-29-02.<BR></FONT><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" >*Category rank denoted by numbers in parentheses.</FONT></P></TD></TABLE> /?></P> <P><SPAN class=v12666666content>An important factor underlying the family's success is a healthy dose of small caps, which have generally outperformed their larger brethren around the globe. International Discovery is a dedicated small-cap fund that buys companies less than $1.5 billion in size. The other funds take an all-cap approach, and most boast a meaningful commitment to smaller companies. (International Growth, the aforementioned also-ran, is the one fund that focuses mostly on large caps.) /?></P> <P><SPAN class=v12666666content>But a small-cap bias doesn't explain all of the outperformance, especially in the case of the regional and emerging-markets funds, because most international funds that invest outside of Western Europe and Japan have a small-to-mid-cap profiles. There simply aren't any General Electric-sized <MSTR:SECURITY>GE</MSTR:SECURITY> companies in the developing world. /?></P> <P><SPAN class=v12666666content>The intriguing element of the story, therefore, lies in these funds' adaptability in an apparently unsympathetic market. In a recent interview, managers Eric Ritter and Emery Brewer, who manage Asia Pacific Growth and Emerging Markets Growth, respectively, and who together manage International Discovery, remark that they haven't amended the Driehaus style one wit. Earnings growth is still the name of the game. But these days, the search for it goes well beyond the tech-media-telecom (TMT) area, which consumed the lion's share of Driehaus' portfolios in the late 1990s. In fact, through bottom-up (company-by-company) screens, Driehaus managers have lately been drawn to an eclectic mix of countries, industries, and businesses. /?></P> <P><SPAN class=v12666666content>As for many international funds, an important commitment to Korean stocks has been a boon at several of the Driehaus funds. Korean banks have begun to extend credit to consumers, and retailers LG Home Shopping and Shinsegae have benefited as a result. Korea's semiconductor firms have also been on a roll. /?></P> <P><SPAN class=v12666666content>Driehaus' forays into other Southeast Asian markets have also been fruitful--and less common among its peers. In that realm Indonesian banks and Thai consumer-finance firms rank among the fast growers and Driehaus favorites. /?></P> <P><SPAN class=v12666666content>Some of Driehaus' European picks have also been strong. Positive consumer trends have boosted some European companies, such as the ultra-hip Puma, which has skyrocketed in the past six months. Central European banks, another industry showing accelerating growth, have found their place in Emerging Markets Growth and European Opportunity. /?></P> <P><SPAN class=v12666666content>That Driehaus' aggressive approach has worked in a variety of market conditions should appeal to investors looking for some foreign spice. A few caveats are necessary, though. First, there's no avoiding these funds' volatility, which is typically among the scariest, despite consistently good calendar-year numbers. Second, the funds don't come cheap: Their expense ratios often top 2%. Third, the Driehaus managers are furious traders, which can lead to capital-gains distributions, so the funds are best held in tax-sheltered accounts. Finally, especially considering that any of these aggressive funds should be smaller parts of a portfolio and that each has a minimum initial investment of $10,000, they're not accessible to many beginning investors. /?></P> <P><SPAN class=v12666666content>All that said, the Driehaus international funds are plainly demonstrating some adaptability, and that sets them apart. /?></P>

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