Starting a new mutual fund in these volatile times isn't the most enviable of tasks, but it's one that Kent Gasaway relishes.

Gasaway is the portfolio manager of the new AFBA 5Star Mid Cap Fund, a growth fund targeting companies with market capitalizations of $1.5 billion to $10 billion.

The manager of the fund, the Armed Forces Benefit Administration (AFBA), based in Alexandria, Va., was established in 1947 to provide life insurance, banking and asset management to Air Force and Army personnel overseas. AFBA opened its family of six mutual funds to the general public last September.

Kornitzer Capital Management Kansas City, Mo., which manages $3 billion in assets, is sub-advisor to the fund. Since the fund's launch in May, it has attracted $100 million in assets.

As manager of a new mid-cap fund, Gasaway believes he can build on his past successes, most notably the recently closed no-load Buffalo Small Cap Fund that he manages at Kornitzer. Over the past three years, the fund has returned an average 15.3%.

"We've had a very successful small-cap fund, and a number of our companies did so well that they've gone above our threshold, so they can't be considered small-cap companies any more," said Gasaway, senior vice president with Kornitzer.

Gasaway said that the strategy behind the new AFBA fund will mirror that of the small cap fund by seeking out companies that provide goods and services in areas poised for growth.

Once Gasaway has identified areas for potential growth, he and his team will conduct fundamental research to find the best companies to fit those trends, while scrutinizing price-to-earnings ratios. "We're very disciplined about valuations, about what we'll pay for a company," he said.

One growth trend Gasaway foresees as offering great opportunity is the changing demographics of the U.S. population. Some population segments are going to grow rapidly over the next 10 years, while others aren't, he said. The 45-to-64 age bracket, for example, is going to grow three times faster than the rest of the population, he said. "So we buy a lot of companies that sell to that group," he said.

One such company is King Pharmaceuticals of Bristol, Tenn., which is in the fund's top 10 holdings. It makes a cardiovascular drug. Others include financial service companies such as H&R Block, of Kansas City, Mo. and the Principal Financial Group, of Des Moines, Iowa, as well as WCI Communities, of Bonita Springs, Fla., a builder of retirement residences.

Another trend Gasaway expects to gain steam is a movement toward outsourcing manufacturing. "That's a trend going on in electronics, healthcare and all kinds of industries," Gasaway said.

One company capitalizing on the outsourcing trend that is among the fund's top 10 holdings is Jabil Circuit of St. Petersburg, Fla. It contracts with firms interested in researching, designing, marketing and branding electronic products but that want to avoid the capital-intensive costs of manufacturing.

Some 30% of the fund's portfolio is comprised of technology companies, mostly semiconductor companies, which the fund manager feels is a cyclical industry that's bottomed out and is poised for recovery. "We don't own anything that had too much money flowing into it when things were booming. We don't own anything in the telecom area, networking or the Internet," Gasaway said.

Consumer cyclicals make up the next largest weighting in the portfolio, followed by financial stocks and health-care.

After identifying companies in industries that would benefit from a trend, Gasaway next applies hard financial analysis. He likes companies without debt, with free cash flow and with stable and improving profit margins.

The final step is valuation. Gasaway is attracted to companies trading at the low end of their historical relative valuations. "We have a proprietary valuation model that compares the profit margins of the company versus its total enterprise value relative to the market," he said.

"We try to be weighted in areas that we think are going to be a big part of the market down the road," he explained. "Typically, the portfolio will be skewed toward areas where the valuations are low. That's why we have a large technology weighting right now."

Once a company passes muster and is included in his portfolio, Gasaway likes to stick with them. In his other funds, asset turnover is less than 25% a year. On average, he holds a stock between three and five years.

While many fund managers decision to buy or sell is affected by overall market conditions, Gasaway said he is not one of them. "What the overall market does really doesn't mean that much to us," he said. "It's going to do what it's going to do. Regardless of what happens, we believe our companies are going to grow."

But when Gasaway does decide to sell a stock, he said, it's due to changing valuation, eroding profit margins, a change in market capitalization or an acquisition or divestiture that affects a company's ability to take advantage of a trend.

Gasaway said that he intends to keep the mid-cap portfolio limited to 40 to 45 names. "We want every company to make a difference," he said.

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