At the no-load Henssler Equity fund, lead manager Gene Henssler paints with two brushes. The broad one is for picking industry

sectors. Henssler is required by charter to diversify across at least nine of the 10 sectors in the S&P 500 Index, but he weights them according to his growth expectations. Then comes the detail work -- the evaluation of individual stocks.

Category Champ: Royce Special Equity Charlie Dreifus makes money on the mundane. Over the past three years, his Royce Special Equity fund has returned an average of 16 percent per year, beating the vast majority of rivals in the small-company value category. Much of the credit goes to Dreifus' traditionally large stake (roughly one-third of assets) in consumer products companies like sneaker-maker K-Swiss. Another edge: Dreifus insists on easily understood business models and conservative accounting. We only wish the fund's marketers were more conservative: Expenses run a high 1.49 percent per year.

This two-step approach has created a good picture for investors. Since opening in mid-1998, Henssler Equity has gained a total of 7 percent (through August). That may not sound exciting until you consider that the average fund in the large-company "blend" category (growth plus value) lost about 14 percent over the same period.

Henssler's sector picking can take much of the credit. For most of its first two years the fund moved in near lockstep with the S&P 500, capturing the last roars of the bull market. But in spring 2000 Henssler veered sharply, cutting his stake in tech stocks to 20 percent of assets from 30 percent. "Tech had come to represent a third of the S&P 500," Henssler says. "To sustain that kind of growth, we would all have had to stuff our mattresses with microchips."

For the big picture, Henssler calls on 30 years of experience as a finance professor, most recently at Georgia's Kennesaw State University. "Long-term, we want to emphasize technology, finance, and healthcare," he says. "Over time, they'll show the strongest growth." Those three sectors currently represent over half of the $47 million portfolio.

But Henssler does take advantage of especially good opportunities in other sectors. "Consumer staples" stocks, for example, are usually good bets during recessions (people have to eat and drink, after all, even when they aren't merry). Beer-maker Anheuser-Busch, up 18 percent this year through August, is Henssler's third-largest holding. And he has big stakes in classic "Old Economy" names like Parker Hannifin and Illinois Tool Works, makers of industrial equipment. "These are not going to be the fastest growers of the next 20 years," he acknowledges. "But in the shorter run, as the economy turns around, these kinds of companies will go crazy."

Sectors chosen, Henssler starts his stock picking with the requirement that every candidate carry a top rating from Value Line

or Standard & Poor's, both independent research firms with, he says, "zero conflict of interest." This test typically leaves fewer than 700 stocks to choose from-eliminating, he says, "a whole bunch of dogs."

Next, Henssler and his team drill down to the dominant players in each industry, generally those he thinks have superior pricing power. Henssler insists that a company's anticipated annual rate of earnings growth over the next five years, combined with any dividend yield, total at least 12 percent. For example, he expects pharmaceuticals giant Bristol-Myers Squibb to increase earnings by an average of 9 percent a year; combined with a 4.4 percent yield, that puts the company over the threshold. (The 12 percent figure was initially chosen because it represented U.S. stocks' long-term average annual return.

Although the current bear market has pulled that return down, Henssler and his team say they have no trouble finding stocks to meet the criterion, so they've stuck with it.)

Finally, Henssler examines a company's profit margins, debt levels, and other aspects of financial strength. The trick, he says, is understanding "how all the variables fit together and how the company fits into the overall economic environment." Only 40 or so companies make the final cut. It may not be fashionable, he notes, "to include the 'top-down' stuff in your calculations. But history says that you can't afford to ignore it." The fund's annual expense ratio of 1.21 percent is on the high side among its peers, but so far it's been well worth paying.