Fund name: WHG SMidcap (WHGMX)

Objective: The fund seeks long term capital appreciation. It pursues that objective by investing in equity securities of small- and mid-cap companies. The current boundaries for the small-to-midcap universe are $500 million and $10 billion. The fund has the right to invest in other stuff, including ETFs and ADRs. The portfolio typically holds 40-60 securities. Its median market cap is $3.5 billion (as of 12/31/06), with about a quarter of the portfolio invested in small and micro-cap stocks.

The investment selection and portfolio construction rules are identical to those used with WHG LargeCap Value and Westwood Equity. When the fund invests in common stocks, it seeks ample free cash flow, low levels of debt and improving debt/equity ratios, improving ROE and "positive earnings surprises without a corresponding increase in Wall Street estimates." Its sell signals include: a security reaching a predetermined price target, a negative change to a company’s fundamentals or a need to improve the overall risk/reward profile of the Fund.

Adviser: Westwood Management Group. Founded in 1983, Westwood is a Dallas, Texas- based, institutional asset management firm that specializes in value equity and income portfolios. The firm’s clients include corporate pension funds, public retirement funds, endowments, foundations, mutual funds, and high net worth individuals. Westwood focuses on delivering consistent, superior long-term performance while limiting downside risk. The firm currently manages approximately $5.5 billion.

Manager: Susan Byrne is the lead manager, as well as founder, chair and Chief Investment Officer of Westwood Management Corp. The fund’s management team appears to have eight other members.

WHG uses an unusually robust team management system for all of their funds. The investment research team is organized by industry. The same team works on all of the funds and separate accounts which have the same objective. The team meets weekly to debate and act upon the various team members’ investment recommendations. The selection process covers three factors: state of the market, state of the portfolio and the relative value of the new recommendation in comparison to the available alternatives. Investment decisions are made by majority agreement of the portfolio team. Ms. Byrne, as lead manager, has a veto over the stock/weight selection.

Inception: December 19, 2005.

Minimum investment: $5,000, reduced on September 21, 2006 from the previous minimum of $100,000.

Expense ratio: 1.25% after expense reimbursements, on an asset base of $23 million. 2.84% without the reimbursements. There is no expiration set for the reimbursements.

Comments: WHG SMidCap is the sister fund to WHG LargeCap Value. It applies that same selection discipline to small- and mid-cap stocks that Ms. Byrne and her team have been applying successfully to large cap stocks for over 20 years. While "value" is not formally a part of the fund’s name, the prospectus stipulates the same procedures in each case and notes that the SMidCap fund (do you suppose SMicroCaps are next?) "focuses on ideas that have limited downside risk."

There are three reasons to take the SMidCap’s prospects seriously. One is the success this portfolio strategy has had in large cap stocks in the Westwood Equity portfolio (12.3% annually over 15 years) and the comparable separate accounts (14.3% annually over the same period). A number of fund companies have had success in using the same value investing disciplines in stocks of different sizes; Artisan Small Value, Midcap Value and Opportunistic Value are just the most recent illustration of that point. A second reason is the success Westwood has had in the separate accounts which focus on midcap investing. Westwood manages about a half billion dollars in midcap money. Those accounts returned an average of 15.5% annually between 1997 and 2005. They outperformed the Russell 2500 index in six of eight years, generally by double digits. While the SMidCap fund hasn’t been around long enough to have a meaningful record, it doesn’t hurt that it has returned 19.5% annualized since inception, 21.6% over the past 12 months and 8.9% YTD (as of Feb. 25). Those are all top decile returns, achieved despite the drag of a 13% cash stake. The third reason is more metaphysical: Westwood didn’t have to do this. That is, they didn’t have to create a new family of funds and subject themselves to the attendant headache and expenses. While I haven’t spoken with representatives of the fund manager, it appears that they acted out of a sense of professionalism and commitment to their investors. Reportedly they objected to Gabelli’s imposition of unnecessarily high fees and decided to do something to correct the situation. That speaks to integrity of character and a confidence in their abilities that gives me reason to believe that they will continue to do right by their investors.

Bottom line: Neither of these funds pursues a "deep value" discipline. Westwood Equity moves between value and blend, and SMidCap’s current portfolio has the same bias. With a tested management team and a great track record behind it, this seems like a strong option for folks looking to diversify a portfolio overweighted to large caps.