Michael Corbett's Perritt MicroCap Opportunities Fund beat 98 percent of competing U.S. mutual funds during the past five years by buying...

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Michael Corbett’s Perritt MicroCap Opportunities Fund beat 98 percent of competing U.S. mutual funds during the past five years by buying shares of companies he says are “underfollowed, underloved and underresearched.”

Two of Corbett’s biggest holdings — Flanders, a maker of air filters, and Barrett Business Services, a human-resources company — have more than tripled in value in the past two years.

Both companies are followed by only one or two analysts. Companies with stock-market values of less than $400 million, such as Flanders and Barrett, are “neglected,” said Corbett, from his office in Chicago. “You can find a lot of inefficiencies. That’s the appeal.”

The $271 million Perritt MicroCap fund has risen at an average annual rate of 18.5 percent in the past five years, through June 1, ranking third among 142 funds that invest in smaller companies reporting above-average earnings and revenue growth.

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In the same period, the Russell 2000 index climbed an average 4.8 percent, and the Standard & Poor’s 500 index fell 3.6 percent.

The $535 million Wasatch Micro Cap Fund, run by Robert Gardiner and Daniel Chace from Salt Lake City, has been the No. 1 performer in its class in the past five years, rising at an annual rate of 22 percent.

Corbett’s fund is down 3.1 percent this year. Shares of smaller companies have declined amid higher borrowing costs, as the Federal Reserve Board has increased its overnight lending rate eight times over the past year.

The performance of funds such as Perritt MicroCap prompted the Russell Investment Group to introduce a micro-cap index to track companies with market values of $55 million to $500 million.

“They’ve had pretty stellar performance, and we needed an appropriate benchmark for that group,” said Kelly Haughton, the strategic director of the Russell indexes. Russell is launching the new index this month.

Corbett’s fund owns 100 to 150 stocks. Newpark Resources of Metairie, La., which provides environmental services to oil companies, was the biggest holding as of March 31, accounting for 1.7 percent of the fund. Newpark has a market value of $519 million. Corbett sells stocks when a company’s market value reaches $1 billion.

Perritt MicroCap’s second-biggest holding is Flanders. The St. Petersburg, Fla., company uses Arm & Hammer baking soda and a Lysol anti-microbial product for some of its filters and markets them using those brand names as well as its own. That’s one reason the Flanders name isn’t better known, Corbett said.

“They’re taking market share and expanding into other businesses,” he said.

Corbett’s third-biggest holding, Barrett Business Services, rose to $14.76 from $2 in the same period.

Barrett, based in Portland, said in February that 2004 sales had jumped almost 60 percent, to $195 million. Leonard Lee of Seidler and Jeff Martin of Roth Capital Partners have “buy” ratings on the stock.

The company will benefit from “a temp business that’s improving,” Corbett said.

“We’re sticking to our traditional approach, focusing on the smallest of companies. It’s fascinating to meet people who have started businesses out of their basements. It’s not a space the general public knows about.”