Change is good, or at least it has been for the owners of the Excelsior Mid Cap Value and Restructuring fund. "The market is reasonably efficient," says co-manager Timothy Evnin, "but it is less good at valuing companies that are going through significant adjustments." That creates fertile ground for Evnin and co-manager John McDermott. But the managers won't buy just any company that's restructuring for their relatively small $290 million fund. Instead, they sift through businesses with market capitalizations roughly between $2 billion and $12 billion, looking for turnaround stories with unrecognized growth potential or the promise of high returns on capital. They also consider stocks hurt by competitive or regulatory shifts and those simply battered by swings in investor sentiment.

One of Evnin and McDermott's recent additions is Kennametal, a Latrobe, Pa., maker of metalworking tools and construction equipment. The company recently raised its dividend and approved a stock-buyback plan. It has also committed to cutting costs significantly over the next couple of years. But the real opportunity, Evnin says, is that Kennametal is restructuring to focus less on traditional metalworking and more on advanced materials, a business with higher margins and better growth potential. "Investors aren't giving them enough credit for a significant restructuring opportunity that we see coming," he says.