THE FBR FUND

One of the things you learn about mutual funds after researching them

over time, is that their names can fool you. Take the FBR Small Cap

Financial fund, for instance. At first glance you might think this fund only

invests in small --and risky---start-up financial type companies. And if you

did, you'd be wrong.

You're not likely to find any promising IPOs or struggling new small

companies inside the portfolio of FBRs Small Cap Financial

fund,(888-888-0025).Instead of the promising are about 50 small regional

thrifts and savings and loan banks that have been around for years. The

reason for the word "small" in the fund's name is that this fund only invests

in really small companies.

"The median market cap in the fund is $116 million and the weighted average

market cap is $185 million, " says David Ellison, who has been the fund's

portfolio manager since its inception in January 1997. "So you're talking

about a micro cap group."

One of the things that's appealing to Ellison about this group of stocks is

that they tend to have a history of consistent profitability. And when it

comes to stock picking, there's a huge universe of companies to pick from.

"This is an industry with a lot of names in it, " says Ellison who has been

managing money in this sector since the mid-1980s. "You've probably got 8000

public banks and thrifts in the country. In this smaller group, there are

probably 500 to 750 names with 120 or so that are not trading below book."

And buying fundamentally strong companies that are priced right is Ellison's

style.

One of the things that might be appealing to investors, is the fund's

performance: Year-to-date, the RBR Small Cap Financial Fund was up 11.65

percent, through May 11, while the average financial services fund was down

3.25 percent, according to Lipper.

Here's more about how this sector fund:

Q: What's attractive to you about this group of small thrifts and savings and

loans?

Ellison: It's a group of stocks that are driven by fundamentals, there

usually isn't a lot of hype, their usually isn't a lot of speculative fever,

there isn't a lot of selling for no reason and the stocks tend to trade

because they merit to trade at certain price to book or a certain price to

earnings. And, you're not buying lousy companies and taking risks based on,

well if they do this right or do that right, then they'll make money.

These companies are well regulated, generally well managed, have been through

good times and bad times and have a business model that works.

Q: Tell me about your investment style.

Ellison: I want to own the cheapest 50 names and cheap to me is based on

price to book and price to earnings. So, I'm going to look at all the company

names that are cheap on book and then take the cheapest ones on book and look

at those that are cheapest on earnings based on an expectation of what

earnings should be.

Then, the ones that make it into the portfolio, I try not to get too

emotional about. Meaning, I do things pretty mechanically because, having

done this for so many years, all the companies that I didn't like because say

of their management or their location, still went up because the stock was

cheap and it ( the investment) made sense.

Q: It sounds as though these thrifts and savings and loans can be a real

sweet place to make money.

Ellison: They can be, but you're not going to make a ton of money in any one

year. This fund is not going to be up 80 percent this year and it probably

never will be up 80 percent in any one year because basically it's a get rich

slow group.

Q: What about some of the holdings, like Florida First Banc and Quaker City.

Ellison: Florida First is a thrift that recently converted to public

ownership. We bought it after it went public at $13 and it's a $600 million

dollar thrift. To give you some perspective on how small the companies are in

the portfolio, that's $600 million in total assets not $600 million in market

cap. I bought it because the stock was cheap on book. But it's not cheap on

earnings anymore because it keeps going up and I'll hold it until it becomes

way overvalued relative to the rest of the group.

Quaker City is a California thrift that I've owned for a long time. The stock

was trading around 23 and 24 dollars for the longest time, and recently went

up four dollars. So this is a classic case of owning something that did

nothing for four or five months and then in two weeks went up four dollars

showing that hanging on to an attractively valued company pays off.