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If You Missed The Bull Market, Try The Mid-Cap Companies The Last Great Undervalued Sector?

If you missed the last bull market, the one that took the Dow Jones Industrial Average from 2000 to 7000 in the past 10 years, then David Klassen may have just the fund for you.

It’s the Vista Capital Growth Fund he manages for Chase Manhattan Corp. It, too, may have missed this last bull market. But Klassen says the mid-cap companies he’s hunting represent the last great undervalued, undiscovered sector.

“More interest has been in the big-cap area where all the performance has been,” said Klassen. Yet, he said, the mid-cap range “is an attractive area of the market with good long-term performance where we can find a number of companies reasonably priced.”

Indeed, 1,300 companies are in Klassen’s universe - a universe his star-wars numbers-crunching analysts have plucked from the ether using nine different screens ranging from “earnings revisions” to “risk adjusted price momentum.” Klassen and his co-manager, Tony Gleason, aren’t exactly kick-the-tires, touchy-feely, seat-of-the-pants stock-pickers.

They call themselves and their $1.2 billion fund “half quant, half fundamental.” The front half, though, is quantitative. If a company doesn’t make it past their screens, they won’t be kicking its tires.

“It ends up being a value fund,” said Klassen. “We’re looking for cheap stocks. The value we’re looking for is growth catalysts - definable catalysts for positive change.”

What that means is energy and refining, paper, financial, and health-care stocks along with some technology stocks thrown in. And while Klassen said, “We don’t look for takeover candidates,” they still managed to buy shares in 13 companies that have been acquired in the past two years.

This fall, the fund will mark its 10th anniversary. Klassen is hoping the mid-cap sector will deliver a great birthday surprise.

Using six criteria that help define the risk-reward equation, here’s a look at whether Vista Capital Growth Fund makes sense for your investment portfolio.

Of the 1,300 stocks that Klassen could buy, he owns no more than about 90 at any given time, and none composes more than 3 percent of the fund’s holdings. The fund confines its holdings largely to companies in the range of $750 million to $4 billion market capitalization.

Its largest single investment is Tenet Healthcare Corp., which operates 127 hospitals in 22 states and whose shares have risen 22.9 percent so far this year.

Its top 10 holdings reveal a broad range of industries - from Carnival Corp. cruise lines to Precision Castparts Corp. to Continental Airlines Inc. and Zions Bancorp.

“We don’t like real volatility of prices,” Klassen said. “We do like accelerating earnings.”

The fund’s biggest risk is that investors won’t discover the mid-cap market that Klassen favors, though he’s not terribly concerned about this. The fund has gone from $80 million in assets at the end of 1992 to $540 million at the end of 1994 to $1.2 billion today.

“Diversification cuts down on volatility,” Klassen said. “We think this is an attractive area of the market.”

Despite Klassen’s confidence in the mid-cap market, so far the fund’s approach hasn’t added up to an overwhelming track record. This year, the fund has returned 3.03 percent, ranking No. 543 of 682 growth funds tracked by Bloomberg. Its record improves as it ages. Over the past five years, its average annualized return was 16.13 percent, ranking No. 71 of 200 growth funds.

But Klassen said he prefers Capital Growth not to be considered a growth fund since the more traditional big-cap growth funds have outperformed his fund just as big-cap stocks have outperformed mid-cap shares.

Still, so far this year, among mid-caps, Vista is No. 32 of 67 funds and over three years it is No. 20 of 30.

Klassen, 38, began running the Vista Capital Growth Fund at the beginning of 1993. Today, he also oversees all Chase’s equity fund investments, which total about $7 billion in more than 20 funds. Before moving to Chase in 1992, Klassen spent 11 years at Dean Witter Reynolds/ Intercapital funds.