Unloved stocks lift Eaton Vance small-cap fund

Nancy Tooke, the third manager of Eaton Vance's Tax Managed Small Cap Growth Fund since 2003, is turning the fund around after a six-year slump.

The fund ranks first this year in its class of 235 competitors, through May 25, after rising 17 percent, data compiled by Bloomberg show.

Tooke revived performance by investing in what she calls "unloved, undervalued" companies such as seismic-data designer Input/Output and ball-bearings maker RBC Bearings.

"I'm an addict in small-cap investing, so if you do your research right, you can always find 80 good names," which is the number of stocks in Eaton Vance's $125 million mutual fund, Tooke said in an interview at her office in Boston.

Tooke, who started tracking the small-cap market in 1989, said she buys companies whose shares trade at a discount to their peers and have the potential to accelerate earnings growth.

The average price-to-earnings ratio of stocks in Small Cap Growth was 20.6 at the end of March, compared with 23.4 for the S&P Smallcap 600 Index.

The fund has an average three-year Sharpe ratio of 0.82 versus 0.61 for its peers, according to industry research firm Morningstar in Chicago.

A higher ratio means better risk-adjusted returns. Morningstar gives Small Cap Growth two stars out of a possible five.

Tooke's five biggest holdings at the end of March were Jarden, the Rye, N.Y.-based maker of camping and outdoor equipment such as Coleman grills; Sioux City, Iowa-based Terra Industries, which makes liquid-nitrogen fertilizer; Central European Media Enterprises of Bermuda, the owner of television networks in the Czech Republic and five other eastern European countries; database-software company Sybase in Dublin, Calif.; and Baltimore-based FTI Consulting.

Energy and industrial companies that are less vulnerable to lower commodities prices and a slowing U.S. economy are among the best investments, Tooke said.

Even if crude prices plunge, Input/Output "would be in a sweet spot in terms of earnings because the search for oil and energy is widespread across the world," said Joseph Zock, who helps oversee $7 billion at New York-based Tocqueville Asset Management and holds about 309,000 shares of the company.

Eaton Vance's fund is tax managed, meaning it tries to limit capital-gains distributions by taking losses to offset them.

In addition to the fund, Tooke started managing money for institutional clients since joining Eaton Vance.