The epitome of a small-shop fund family, Westport boasts two offerings and a staff of seven. With a streamlined operation and little in the way of media appearances, Westport R (WPFRX) manager Edmund Nicklin, Jr. and his analysts have plenty of time to uncover opportunities in the midcap segment.

Focusing on undervalued stocks, Nicklin uses what he terms a second-generation value approach. Relying on traditional value metrics such as low price-to-earnings ratios, he analyzes cash flows on a forward-looking basis and looks for a catalyst that will drive earnings growth and price appreciation.

He also looks at fair valuation measures from the perspective of potential acquirers and has a history of picking takeover candidates. Last year four of his picks were acquired by other firms.

An opportunistic investor, he’s a self-educated expert on bankruptcy law and sometimes uses this knowledge to pick up solid businesses that were forced to seek court protection. He’s also dug deeply into oil and gas producers, studying seismic maps and well logs when valuing drillers.

The fund is heavy on the energy sector, which accounts for almost 15 percent of assets, though Nicklin has scaled back the allocation from 20 percent in the fourth quarter. That led to some heavy hits in the third quarter of last year. EOG Resources (NYSE: EOG) and Forest Oil Corp (NYSE: FST), which together account for about 10 percent of investable assets, lost between 20 and 60 percent of their value amid sharply declining oil prices.

FMC Corp (NYSE: FMC), a chemical manufacturer, also generated a substantial loss. A large portion of the company’s revenues are generated by its agricultural chemicals division; despite record third-quarter profits, the stock has sold off amid concern over chemical demand in a recession.

But Nicklin is a buy-and-hold investor, and he continues to add to his positions in FMC Corp and oil and gas producers. He’s betting on a recovery in the energy business, and we agree with his take. Since the fund’s inception in 1997, there have been only two down years: 2002, a tough year for mid-caps generally, and 2008, a tough one for everybody.

His commitment to solid companies has paid off, helping him outperform the S&P 500 by about 7 percent on a total return basis and its benchmark midcap index by almost 9 percent. That placed the fund in the top 13 percent of mid-cap blend funds last year.

Results have also been helped by the fact that Nicklin isn’t mandated to remain fully invested at all time; he can go to cash when there just aren’t enough opportunities available. Almost a quarter of assets are currently in money market funds and Treasury bills, leaving him with cash on hand to take advantage when the market turns.

And he’s well incentivized to do so. According to the fund’s latest Securities and Exchange Commission filings, Nicklin has more than $1 million of his own money invested in the fund, ranking him among the most heavily invested fund managers in the game.

Wesport R is also extremely tax efficient. Nicklin isn’t a churn-and-burn investor; the fund’s turnover rate usually hovers in the low single digits. And the fund’s year-end distribution was just 5.4 cents in 2008, with one-hundredth of a cent taxed as ordinary income and the remainder taxed as capital gains. In light of 2008 losses, capital gains going forward should be largely sheltered.

But Westport R isn’t without risks; Nicklin runs an extremely concentrated portfolio of only about 40 securities at any given time–one slip can be costly. But he has a long track record of success, and Westport R is an excellent way of gaining exposure to the soon-to-be-hot-again energy sector.

WHY TO BUY

WESTPORT R (WPFRX)

-Extremely tax efficient with low turnover
-An excellent diversified play on energy
-A value bent means the fund doesn’t chase hot sectors