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Michael Corbett, Perritt Capital Growth

Since battling fed-up shareholders and a board that wanted to liquidate his fund, small-cap manager Michael Corbett has thrived.

Katie Rushkewicz, 04/19/2010

1999 was prosperous for mutual funds riding the wave of the bull market, but Perritt Capital Growth Fund struggled. The fund's board wanted to liquidate the fund, which had been limping along with just $9 million in assets after two years of losses. Some shareholders were getting fed up that comanager Michael Corbett wasn't buying the roaring technology stocks that were producing triple-digit gains, stocks that were too speculative and expensive for his liking. As a result, the fund lost 8% in 1999--a year in which the Russell 2000 Index gained 21%.

It would have been easy to shut down the fund, but Corbett refused to give up. He and two operations employees had been working for almost nothing in the late 1990s as they tried to keep the fund afloat. Quitting after a couple of rough years didn't jibe with the fund's long-term investing philosophy. The board reluctantly agreed to keep the fund open. Corbett assumed lead manager duties, and firm founder and figurehead Gerald Perritt stepped back from day-to-day duties but stayed on as an advisor. Corbett would have to work through this rough patch, improve performance in the midst of a burgeoning tech bubble that he didn't buy into, and attract shareholders, all with limited resources.

Those Who Can, Do. Those Who Can't, Teach.
This wasn't the first time the fund had been on shaky ground. The fund badly lagged other small-cap funds after its 1988 inception. News articles even questioned whether Perritt, an author and former finance professor at DePaul University in Chicago, was better suited to explaining investing than actually doing it. Others disagreed. Perritt gained a following after launching a series of investment newsletters in 1983, including The Mutual Fund Letter. But some subscribers wanted Perritt to run their money instead of just giving advice, so in 1987 he founded Perritt Investments (now Perritt Capital Management), a wholly owned subsidiary of his newsletter firm. Soon after, he began managing private client accounts, constructing different asset-allocation portfolios using mutual funds.

In 1988, Perritt used his own money to seed Perritt Capital Growth, a micro-cap mutual fund that changed its name to Perritt Micro Cap Opportunities PRCGX in 1997. Perritt had long been intrigued with academic research showing that small companies had historically outperformed large companies on a risk- adjusted basis. One of his newsletters, Investment Horizons, was even dedicated to small-cap stocks. In some ways, Perritt was one of the pioneers of micro-cap investing. Only a handful of micro-cap funds that launched in the 1980s are still around today.

Despite the fund's initial woes, Perritt continued building his investment business, counting family, friends, and former newsletter subscribers as his clients. In 1990, he hired DePaul graduate Corbett to help him with his newsletters. The job gave Corbett valuable training, allowing him to interview renowned managers such as Ralph Wanger of Columbia Acorn and Preston Athey of T. Rowe Price Small-Cap Value PRSVX. Eventually, Corbett assumed more responsibility and became a research analyst.

When Perritt decided to move to Florida in 1996, Corbett, a Chicagoan born and bred, declined offers to follow him. Instead, Corbett became comanager and started picking stocks for the first time, collaborating with Perritt via telephone.PAGEBREAK

After the Bubble
Corbett made the jump to lead manager at an inauspicious time for the fund--during the late-1990s tech bubble. It was the firm's low point, but the transition gave the fund a chance at a fresh start. Corbett still believed that investing in financially sound micro- cap companies at reasonable prices would work over the long run, but he tweaked the process to better account for company-specific risk. He increased the number of holdings in the portfolio to 100 from 60 and capped positions at 3% of assets, regardless of how much he liked a stock. He also formalized a nine-step research process to grade companies and took a stricter approach to selling stocks that ran up in price, a topic on which he and Perritt occasionally disagreed.

As the tech bubble burst, the fund turned a corner. It made money in 2000 and started attracting interest from investors after landing at the top of the small-blend category from 2001 to 2003. Some of the inflows were from fickle retail investors who poured money in after the fund's big gains in 2001 and yanked it out after a modest return of 0.46% in 2002. The hot money aggravated Corbett, so he pushed for a 2% redemption fee on withdrawals made within the first 90 days. At the same time, Corbett decided to pursue investors through advisors and institutions, which had historically composed just one fifth of the fund's assets. (Today, they make up more than half of the fund's assets.) In 2003, a big investment from an advisor pushed assets past the $50 million mark, and a feature story in The New York Times helped the fund exceed $100 million. The fund was on the map.

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