In April, portfolio analyst Jason B. Selch traveled to western Siberia to personally check on a private investment made by Liberty Acorn International, a mutual fund managed by his employer, Liberty Wanger Asset Management LP . For this fund and four others that make up the Liberty Acorn family of mutual funds, Selch manages some $647 million of energy investments. That's an amount greater than that invested by most natural resource funds. What's more, the Liberty Acorn funds are often one of the largest shareholders in a stock. "So, we have to be careful, and get very close to management," Selch says. Hence, the trip to Russia. The Chicago-based company he works for has about $9 billion under management. According to Lipper Analytical, its biggest and most well-known fund, Liberty Acorn , is the number one small-cap performer during a 10-year period, and it holds five-star status from Morningstar. Liberty Acorn Fund was up 10.1% last year, outperforming most stock indices. "The late-1990s tech cycle was the biggest 'bacle/debacle' we've seen since the energy boom and bust in the 1970s and 1980s. Against this backdrop, we feel surviving 2000 with a 10% return was a good result," said Ralph Wanger, president and chief investment officer for Liberty Wanger, and lead portfolio manager for Liberty Acorn Fund, in his annual report to investors. Since inception in June 1970, the fund has returned an average 16.9% annually, making Wanger something of a legend among mutual fund gurus. In 2000, energy equities made up 13.9% of the fund's net assets of $4 billion. That sector's gains offset the fund's losses, which were largely due to-you guessed it-software, computer, media and telecom stocks. Of the fund's top 10 holdings, two are in energy: Cross Timbers Oil Co. , 2.6%, and Dynegy Corp. , 2%. It also holds a large stake in Equitable Resources , which doubled last year. Selch really likes Dynegy. As of December 31, 2000, it also made up 3.2% of small-blend fund Liberty Acorn USA and 6% of Liberty Acorn Twenty. Last year, Selch's energy portfolio was up 69.5%, driven by the spectacular rise in Cross Timbers, which soared 360%, and Dynegy, up 220%. "At the beginning of 2000, we were the largest shareholder in Cross Timbers and one of the largest in Dynegy," he says. The analyst tends to invest meaningful amounts in a few small, overlooked companies that can take advantage of some industry trend he has spotted. But many of the stocks have since grown into large caps. Often the funds continue to hold them if they still meet Acorn's investment criteria, even though they may have exceeded the limit on market capitalization. For example, Acorn has held Devon Energy since its market cap was about $400 million, because it first owned Calgary-based Northstar before the latter merged with Devon in 1999. "Devon always traded at a premium because people think it has very good management. Now it is trading at a discount because they have a market cap of $8 billion, and they are newcomers to the large-cap club. But people who knew them when they were smaller still think they have good management. The same guys are running it. They always position themselves as the solution to some other company's problems when they make an acquisition. "But, since I've grown into some large caps by owning Devon and Cross Timbers, I've bought Western Gas Resources and Louis Dreyfus Natural Gas recently, to move into some smaller caps," Selch says. He has been bullish on energy since the spring of 2000. "In the Acorn Fund, we moved from market weight to overweight and energy is still 12.15% of the fund today. The low natural gas storage numbers after a record warm winter did it. They implied a gas shortage, so last March and April [2000] we moved to an overweight position." At present, his other largest holdings, based on dollar value, include Precision Drilling Co. and Talisman Energy of Calgary, and Saipem, the Italian offshore construction and drilling company. Selch knows his way around the oil patch. After graduating from the University of Chicago in 1982, the Manhattan native's first job was at a Dunagan Tool & Supply store in Watonga, Oklahoma, "selling rope, soap and dope" as oil-patch veterans like to say. This may not be nearly as exotic as Russia, perhaps, but it gave him insights many energy analysts do not have. Later, he returned to Chicago for his MBA, which he received in 1988. Then he was a financial manager for Western Geophysical while based in Gabon, West Africa. Next, he consulted on coalbed methane studies being done by A mmonite Resources in Connecticut for two years. Lastly, he was an associate for Frank Weisser of Weisser, Johnson in Manhattan, the private equity intermediary for independent producers. He joined Wanger seven years ago. "This varied career experience has really been very beneficial to me," Selch says. His modus operandi is to develop a theme based on industry trends and then select companies that fit within that theme, or will be able to take advantage of it. Today, as natural gas prices have spiked and shortages loom, he is loading up on gassy stocks such as Louis Dreyfus and Western Gas Resources . He is watching Pyr Energy and others in the California deep-gas play with a great deal of interest, although at press time he had not yet acted on those. "I also look for stocks that are undervalued relative to their peer group, in sectors where we want to be. We intend to get our return from being right on the theme and then getting into something early, before it is widely recognized-a kind of double whammy. That's the only way you can end up being the No. 1 small-cap fund for more than 10 years, per Lipper. You play it through the nonobvious ways." For one reason or another, Cross Timbers and Dynegy fit that bill at the time Selch first invested in them, although for different reasons. "Cross Timbers was a company that lost sponsorship on the Street when they bought all those energy stocks and then leveraged up the balance sheet," Selch recalls. "I noticed that they acquired 240 billion cubic feet of reserves in East Texas from Enserch [today, EEX Corp. ], but I knew that in fact, it was really 1 trillion cubic feet that Enserch had had to write down after they were spun out of TXU. I thought to myself, 'East Texas is a great basin-if gas prices go up, the fact that Cross Timbers is overleveraged will be forgotten.'" Dynegy was not highly touted at the time he got in because the float was only 10% of the outstanding shares. Until the 2000 merger with Illinova, the natural gas marketer was 90% owned by Chevron, Nova, British Gas and company management. "All the investment bankers knew Dynegy and liked them, wanted to do a deal with them, but they wondered how to get Fidelity into the stock." But there is more to the story, for Selch's familiarity with Dynegy goes way back. He first followed the company when it was known as Natural Gas Clearinghouse and had not yet gone public. While working with Weisser, he assisted in a dataroom, analyzing acquisition candidates for NGC. Acorn Fund bought shares in publicly traded Trident NGL in anticipation of its 1995 merger with NGC, which in effect took the latter public. The fund still holds Dynegy even though it is no longer a small-cap stock. When Dynegy announced its merger with utility holding company Illinova in 1999, Selch, by then at Wanger, forecast an improved competitive position and a larger stock float ahead-one reason to hike the fund's holdings. But the decision to buy also had to do with intangibles-Selch turned out to be the only analyst attending a meeting in Chicago meant to outline details of the pending merger. That led Liberty Acorn Fund to increase it holdings even more. After the merger closed, the stock rose 220% in 2000 and became Liberty Acorn's fifth-largest position, now occupying 2% of the $4-billion fund. Meanwhile, Selch is no stranger to the Canadian oil patch, having begun investing there in 1998. He has done well with many of his holdings: Penn West Petroleum was trading at C$16 per share when he first bought it, yet it is now at about C$39. Canadian Natural Resources was at C$26 and is now around C$45. "We got in there because of the pipeline additions and the shrinking gas price differential. These are two of the best-run companies in Canada. Last summer we bought Talisman Energy as a takeover candidate and we bought Precision Drilling because I wanted exposure to North American service companies. I think Precision is better managed than most U.S. drillers and they have a greater market share there than the U.S. companies do here. And, Precision trades at 14 times earnings versus 24 times for Nabors Drilling ." (For more on Precision, see "More Pie, Please," Oil and Gas Investor, October 1999.) In general, Selch prefers the foreign-based service companies to their U.S. counterparts. He finds that they typically employ new technologies, have greater market share in their respective markets and trade at lower multiples. That's why he owns Expro International , Technip and Fugro as well. "These European service companies have outperformed the U.S. ones. Technip is trading at only 13 times 2001 earnings. It turnkeys big projects like an LNG plant in Nigeria, plus I think offshore construction will see an upturn soon, which will benefit its 30%-owned affiliate, Coflexip ." Selch also tracks domestic industry trends carefully. "In June 1998 when rig rates cracked in the Gulf of Mexico, I spent the summer working closely with Allen Brooks [research analyst for CIBC Oppenheimer in Houston], looking at valuations. At the time, Ralph Wanger was calling every day saying, 'Sell, sell, sell.' I didn't act as early as I should have-I wanted to keep studying things. I was affected by the fact that Weatherford International came down from $60 to $35 in a couple weeks. "The bottom line is, when things roll over, you have to hold your nose and do what you have to do-sell. And, stop studying it. What we did do, which turned out to be smart, was sell our lower-quality names like Costilla , Petsec , Abraxas and Coho . But I kept Weatherford and some others too long-I was too attached to them to do what was right," Selch says. Likewise, when he saw that the majors were underspending their drilling budgets internationally, yet had so much extra cash, "I figured they might start buying up large independents with international assets. So, last summer I bought a collection of takeover candidates: Talisman, BG Group and Enterprise ." Since then, he notes, Shell has acquired Fletcher Challenge and Eni has acquired Lasmo . He sees Shell's recent attempt to buy gas-rich Barrett Resources of Denver as a paradigm shift. "It was a complete shock, something that hasn't been fully recognized by the market yet. I thought Shell would go after the non-U.S. independents. If a major's stock is trading at a big premium to the independents, it can go buy one in order to show growth. The market wants to see growth. But it has as much to do with simplicity as with valuation-the major can spend a billion dollars and send in one person to run an independent [keeping all the target's former employees]. He adds, "I think Burlington Resources ' low valuation [makes it vulnerable]."