Objective

The Fund pursues long-term capital appreciation by investing primarily in common stocks of small and mid-cap companies, those with market caps under $5 billion. The Fund typically invests in 40 to 50 companies. The manager reserves the right to go to cash as a temporary move but is generally 94-97% invested.

Adviser

Walthausen & Co., LLC, which is an employee-owned investment adviser located in Clifton Park, NY. Mr. Walthausen founded the firm in 2007. In September 2007, he was joined by the entire investment team that had worked previously with him at Paradigm Capital Management, including an assistant portfolio manager, two analysts and head trader. Subsequently this group was joined by Mark Hodge, as Chief Compliance Officer, bringing the total number of partners to six. It specializes in small- and mid-cap value investing through separate and institutional accounts, and its two mutual funds. They have about $1.4 billion in assets under management.

Manager

John B. Walthausen. Mr. Walthausen is the president of the Advisor and has managed the fund since its inception. Mr. Walthausen joined Paradigm Capital Management on its founding in 1994 and was the lead manager of the Paradigm Value Fund (PVFAX) from January 2003 until July 2007. He oversaw approximately $1.3 billion in assets. He’s got about 35 years of experience and is supported by four analysts. He’s a graduate of Kenyon College (a very fine liberal arts college in Ohio), the City College of New York (where he earned an architecture degree) and New York University (M.B.A. in finance).

Strategy capacity and closure

In the neighborhood of $2 billion. That number is generated by three constraints: he wants to own 40 stocks, he does not want to own more than 5% of the stock issued by any company, and he wants to invest in companies with market caps in the $500 million – $5 billion range. In the hypothetical instance that  market conditions led him to invest mostly in $1 billion stocks, the calculation is $50 million invested in each of 40 stocks = $2 billion. Right now the strategy holds about $200 million.

Active share

Not calculated. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. They’ve done the calculation for an investor in their separate accounts but haven’t seen demand for it with the mutual funds.

Management’s stake in the fund

Mr. Walthausen has between $500,000 and $1,000,000 in this fund, over $1 million invested in his flagship fund, and he also owns a majority stake in the fund’s adviser.

Opening date

December 27 2010.

Minimum investment

$2,500 for all accounts. There’s also an institutional share class with a $100,000 minimum and 1.22% expense ratio.

Expense ratio

1.47% on an asset base of about $40 million (as of 03/31/2014).

Comments

It’s hard to know whether to be surprised by Walthausen Select Value’s excellent performance. On the one hand, the fund has some fairly pedestrian elements. It invests primarily in small- to mid-cap domestic stocks. Together they represent more than 90% of the portfolio, which is about average for a small-blend fund. Likewise for the average market cap. The portfolio is compact – about 40 names – but not dramatically so. Their strategy is to pursue two sorts of investments:

Special situations (firms emerging from bankruptcy or recently spun-off from larger corporations), which average about 20% of the portfolio though there’s no set allocation to such stocks.

Good dull plodders – about 80% of the portfolio. These are solid businesses with good management teams that know how to add value. This second category seems widely pursued by other funds under a variety of monikers, mid-cap blue chips and steady compounders among them.

His top holdings are shared with 350-700 other funds.

And yet, the portfolio has produced top-tier results. Over the past three years, the fund’s 17.8% annualized returns places it in the top 3% of all small-blend funds. It has finished in the top half of its peer group each year. It has never trailed its peer group for more than two consecutive months.

Should we be surprised? Not really. He’s doing here what he’s been doing for decades. The case for Walthausen Select Value is Paradigm Value (PVFAX), Paradigm Select (PFSLX) and Walthausen Small Cap Value (WSCVX). Those three funds had two things in common: each holds a mix of small and mid-cap stocks and each has substantially outperformed its peers.

Paradigm Select turned $10,000 invested at inception into $16,000 at his departure. His average mid-blend peer would have returned $13,800.

Paradigm Value turned $10,000 invested at inception to $32,000 at his departure. His average small-blend peer would have returned $21,400. From inception until his departure, PVFAX earned 28.8% annually while its benchmark index (Russell 2000 Value) returned 18.9%.

Walthausen Small Cap Value turned $10,000 invested at inception to $26,500 (as of 03/28/2014). His average small-value peer would have returned $17,200. Since inception, WSCVX has out-performed every Morningstar Gold-rated fund in the small-value and small-blend groups. Every one. Want the list? Sure:

• Artisan Small Cap Value
• DFA US Microcap
• DFA US Small Cap
• DFA US Small Cap Value
• DFA US Targeted Value
• Diamond Hill Small Cap
• Fidelity Small Cap Discovery
• Royce Special Equity
• Vanguard Small Cap Index, and
• Vanguard Tax-Managed Small Cap

The most intriguing part? Since inception (through March 2014), Select Value has outperformed the stellar Small Cap Value.

There are, of course, reasons for caution. First, like Mr. Walthausen’s other funds, this has been a bit volatile. Beta (1.02) and standard deviation (17.2) are just a bit above the group norm. Investors here need to be looking for alpha (that is, high risk-adjusted returns), not downside protection. Because it will remain fully-invested, there’s no prospect of sidestepping a serious market correction. Second, this fund is more concentrated than any of his other charges. It currently holds 40 stocks, against 80 in Small Cap Value and 65 in his last year at Paradigm Select. Of necessity, a mistake with any one stock will have a greater effect on the fund’s returns. At the same time, Mr. Walthausen believes that 80% of the stocks will represent “good, unexciting companies” and that it will hold fewer “special situation” or “deeply troubled” firms than does the small cap fund. And these stocks are more liquid than are small or micro-caps. All that should help moderate the risk. Third, Mr. Walthausen, born in 1945, is likely in the later stages of his investing career. 

Bottom line

There’s reason to give Walthausen Select careful consideration. There’s a quintessentially Mairs & Power feel about the Walthausen funds. In conversation, Mr. Walthausen is quiet, comfortable, thoughtful and understated. In execution, the fund seems likewise. It offers no gimmicks – no leverage, no shorting, no convertibles, no emerging markets – and excels, Mr. Walthausen suggests, because of “a dogged insistence on doing our own work and reaching our own conclusions.” He’s one of a surprising number of independent managers who attribute part of their success to being “far from the madding crowd” (Malta, New York, in his case). Folks willing to deal with a bit of volatility in order to access Mr. Walthausen’s considerable skill at adding alpha should carefully consider this splendid little fund.

Website

Walthausen Funds homepage, which remains a pretty durn Spartan spot but there’s a fair amount of information if you click on the tiny text links across the top.

[cr2014]

Objective and strategy

The fund is pursuing both high current income and capital appreciation. The fund primarily invests in shorter-term high-yield corporate bonds, bank debt, convertibles and U.S. government securities. They have the option of buying a wider array of income-producing securities, including investment-grade debt, dividend-paying common or preferred stock. It shifts between security types based on what the manager’s believe offers the best risk-adjusted prospective returns and is also willing to hold cash. The portfolio is generally very concentrated. 

Adviser

Intrepid Capital Management of Jacksonville Beach, Florida. Intrepid, founded in 1994, primarily serves high net worth individuals.  As of December 30, 2013, it had $1.4 billion in assets under management. Intrepid advises the four Intrepid funds (Capital, Small Cap, Disciplined Value and Income).

Manager

Jason Lazarus, with the help of Ben Franklin, and Mark Travis. Messrs. Franklin and Lazarus joined Intrepid in 2008 after having completed master’s degrees at the University of North Florida and Florida, respectively. Mr. Travis is a founding partner and has been at Intrepid Capital since 1994. Before that, he was Vice President of the Consulting Group of Smith Barney and its predecessor firms for ten years.

Strategy capacity and closure

The managers estimate they might be able to handle up to $1 billion in this strategy. Currently the strategy manifests itself here, in balanced separate accounts and in the fixed-income portion of Intrepid Capital Fund (ICMBX/ICMVX).  In total, they’re currently managing about $300 million.   

Management’s stake in the fund

All of the managers have investments in the fund. Mr. Lazarus has invested between $50,000 – 100,000; Mr. Franklin has invested between $10,000 – 50,000 and Mr. Travis has between $100,000 – 500,000. That strikes me as entirely reasonable for relatively young investors committing to a relatively conservative fund.

Opening date

You get your pick! The High-Yield Fixed Income strategy, originally open only to private clients, was launched on April 30, 1999.  The fund’s Investor class was launched on July 2, 2007 and the original Institutional class on August 16, 2010.

Minimum investment

$2,500.  On January 30, 2014, the Investor and Institutional share classes of the fund were merged. Technically the surviving fund is institutional, but it now carries the low minimum formerly associated with the Investor class.

Expense ratio

0.90% on assets of $106 million. With the January 2014 merger, retail investors saw a 25 bps reduction in their fees, which we celebrate.

Comments

There are some very honorable ways to end up with a one-star rating from Morningstar.  Being stubbornly out-of-step with the herd is one path, being assigned to an inappropriate peer group is another. 

There are a number of very good conservative managers running short-term high yield bond funds who’ve ended up with one star because their risk-return profiles are so dissimilar from their high-yield bond peer group.  Few approach the distinction with as much panache as Intrepid Income:

Why the apparent lack of concern for a stinging and costly badge? Two reasons, really. First, Intrepid was founded on the value of independence from the investment herd. Mr. Lazarus reports that “the firm is set up to avoid career risk which frequently leads to closet-indexing.  Mark and his dad [Forrest] started it, Mark believes in the long-term so managers are evaluated on process rather than on short-term outcomes. If the process is right but the returns don’t match the herd in the short term, he doesn’t care.”  Their goal, and expectation, is to outperform in the long-term. And so, doing the right thing seems to be a more important value than getting recognized.

In support of that observation, we’ll note that Intrepid once employed the famously independent Eric Cinnamond, now of Aston/River Road Independent Value (ARIVX), as a manager – including on this fund.

Second, they recognize that their Morningstar rating does not reflect the success of their strategy. Their intention was to provide reasonable return without taking unnecessary risks. In an environment where investment-grade bonds look to return next-to-nothing (by GMO’s most recent calculations, the aggregate US bond market is priced to provide a real – after inflation – yield of 0.4% annually for the remainder of the decade), generating a positive real return requires looking at non-investment-grade bonds (or, in some instances, dividend-paying equities). 

They control risk – which they define as “losing money” or “permanent loss of capital,” as opposed to short-term volatility – in a couple ways.

First, they need to adopt an absolute value discipline – that is, a willingness both to look hard for mispriced securities and to hold cash when there are no compelling options in the securities market – in order to avoid the risk of permanent impairment of capital. That generally leads them to issuers in healthy industries, with predictable free cash flow and tangible assets. It also leads to higher-quality bonds which yield a bit less but are much more reliable.

Second, they tend to invest in shorter-term bonds in order to minimize interest rate risk. 

If you put those pieces together well, you end up with a low volatility fund that might earn 3.5 to 4.5% in pricey markets and a multiple of that in attractively valued ones. Because they’ve never had a bond default and they rarely sell their bonds before they’re redeemed (Mr. Lazarus recalls that “I can count on two hands the number of core bond positions we’ve sold in the past five years,” though he also allows that they’ve sold some small “opportunistic” positions in things like convertibles), they can afford to ignore the day-to-day noise in the market. 

In short, you end up with Intrepid Income, a fund which might comfortably serve as “a big part of your mother’s retirement account” and which “lots of private clients use as their core fixed-income fund.”

In both the short- and long-term, their record is excellent.  The longest-term picture comes from looking at the nearly 15 year record of the High-Yield Fixed Income strategy which is manifested both in separate accounts and, for the past seven years, in this fund.

Since inception, the strategy has earned 7.25% annually, trailing the Merrill Lynch high-yield index by just 38 basis points.  That’s about 94% of the index’s total return with about 60% of its volatility.  Over most shorter periods (in the three to ten year range), annual returns have been closer to 5-6%.

In the shorter term, we can look at the risks and returns of the fund itself.  Here’s Intrepid Income charted against its high-yield peer group.

By every measure, that’s a picture of very responsible stewardship of their shareholders’ money.  The fund’s beta is around 0.25, meaning that it is about one-fourth as volatile as its peers. Its standard deviation from inception to January 2014 is just 5.52 while its peers are around nine. Its maximum drawdown – 14.6% – occurred over a period of just three months (September – November 2008) before the fund began rebounding. 

Bottom Line

The fund’s careful, absolute value focus – shorter term, higher quality high-yield bonds and the willingness to hold cash when no compelling values present themselves – means that it will rarely keep up with its longer-term, lower quality, fully invested peer group.

And that’s good. By the Observer’s calculation, Intrepid Income qualifies as a “Great Owl” fund. That’s determined by looking at the fund’s risk-adjusted returns (measured by the fund’s Martin Ratio) for every period longer than one year and then recognizing only funds which are in the top 20% for every period. Intrepid is one of the few high-yield funds that have earned that distinction. While this is not a cash management account, it seems entirely appropriate for conservative investors who are looking for real absolute returns and have a time horizon of at least three to five years. You owe it to yourself to look beyond the star rating to the considerable virtues the fund holds.

Fund website

We think it’s entirely worth looking at both the Intrepid Income Fund homepage and the homepage for the underlying High-Yield Fixed Income strategy. Because the strategy has a longer public record and a more sophisticated client base, the information presented there is a nice complement to the fund’s documentation.

[cr2014]

At the time of publication, this fund was named ASTON / River Road Long-Short.
This fund was previously profiled in June 2012. You can find that profile here.
This fund was formerly named AMG River Road Long-Short Fund.

On August 16, 2021 AMG River Road Long-Short Fund became 
AMG River Road International Value Equity Fund. At that point,
everything changed except the fund's ticker symbol: new strategies, 
new management team, new risks, new benchmark. As a result,
the analysis below is for archival purposes only. Do not rely
on it as a guide to the current fund's prospects or practices. 

Objective and Strategy

ARLSX seeks to provide absolute returns (“equity-like returns,” they say) while minimizing volatility over a full market cycle. The fund invests, long and short, mostly in US common stocks but can also take positions in foreign stock, preferred stock, convertible securities, REITs, ETFs, MLPs and various derivatives. The fund is not “market neutral” and will generally be “net long,” which is to say it will have more long exposure than short exposure. The managers have a strict, quantitative risk-management discipline that will force them to reduce equity exposure under certain market conditions.

Adviser

Aston Asset Management, LP, which is based in Chicago. Aston’s primary task is designing funds, then selecting and monitoring outside management teams for those funds. As of December 31, 2013, Aston is the adviser to 23 mutual funds with total net assets of approximately $15.9 billion. Affiliated Managers Group (AMG) has owned a “substantial majority” of Aston for years. In January 2014 they exercised their right to purchase the remainder of the company. AMG’s funds will be reorganized under Aston, but Aston’s funds will maintain their own identity. AMG, including Aston, has approximately $73 billion in assets across 62 mutual funds and sub-advised products.

Managers

Matt Moran and Daniel Johnson. Both work for River Road Asset Management, which is based in Louisville. They manage $10 billion for a variety of private clients (cities, unions, corporations and foundations) and sub-advise six funds for Aston, including the splendid (and closed) Aston/River Road Independent Value (ARIVX). River Road employs 19 investment professionals. Mr. Moran, the lead manager, joined River Road in 2007, has about a decade’s worth of experience and is a CFA. Before joining River Road, he was an equity analyst for Morningstar (2005-06), an associate at Citigroup (2001-05), and an analyst at Goldman Sachs (2000-2001). His MBA is from the University of Chicago. Mr. Johnson is a CPA and a CFA. Before joining River Road in 2006, he worked at PricewaterhouseCoopers.

Strategy capacity and closure

Between $1 and $1.5 billion.

Management’s Stake in the Fund

Mr. Moran and Mr. Johnson had between $100,000 and $500,000 as of the last-filed Statement of Additional Information (October 30, 2012). Those investments represent a significant portion of the managers’ liquid net worth.

Opening date

May 4, 2011.

Minimum investment

$2,500 for regular accounts and $500 for retirement accounts.

Expense ratio

1.70%, after waivers, on assets of $220 million. The fund’s operating expenses are capped at 1.70%, but expenses related to shorting add another 1.46%. Expenses of operating the fund, before waivers, are 5.08%.

Comments

When we first wrote about ARLSX eighteen months ago, it had a short public record and just $5.5 million in assets. Nonetheless, after a careful review of the managers’ strategy and a long conversation with them, we concluded:

[F]ew long-short funds are more sensibly-constructed or carefully managed than ARLSX seems to be.  It deserves attention. 

We were right. 

River Road’s long-short equity strategy is manifested both in ARLSX and in a variety of institutional accounts. Here are the key metrics of that strategy’s performance, from inception through December 30, 2013.

How do you read that chart? Easy. The first three measure how the managers perform on the upside; higher values are better. The second three reveal how they perform on the downside; lower values are better. The final two ratios reflect an assessment of the balance of risks and returns; again, higher is better.

Uhhh … more upside, less downside, far better overall.

The Sharpe and Sortino ratios bear special attention. The Sharpe ratio is the standard measure of a risk/return profile and its design helped William Sharpe win a Nobel Prize for economics. As of December 31, 2013, River Road had the highest Sharpe ratio of any long-short strategy. The Sortino ratio refines Sharpe, to put less emphasis on overall volatility and more on downside volatility. The higher the Sortino ratio, the lower the prospects for a substantial loss.

After nearly three years, ARLSX seems to be getting it right and its managers have a pretty cogent explanation for why that will continue to be the case.

In long stock selection, their mantra is “excellent companies trading at compelling prices.” Between 50% and 100% of the portfolio is invested long in 15-30 stocks. They look for fundamentally attractive companies (those with understandable businesses, good management, clean balance sheets and so on) priced at a discount to their absolute value. 

In short stock selection, they target “challenged business models with high valuations and low momentum.” In this, they differ sharply from many of their competitors. They are looking to bet against fundamentally bad companies, not against good companies whose stock is temporarily overpriced. They can be short with 10-90% of the portfolio and typically have 20-40 short positions.

Their short universe is the mirror of the long universe: lousy businesses (unattractive business models, dunderheaded management, a history of poor capital allocation, and favorites of Wall Street analysts) priced at a premium to absolute value.

Finally, they control net market exposure, that is, the extent to which they are exposed to the stock market’s gyrations. Normally the fund is 50-70% net long, though exposure could range from 10-90%. The extent of their exposure is determined by their drawdown plan, which forces them to react to reduce exposure by preset amounts based on the portfolio’s performance; for example, a 4% decline requires them to reduce exposure to no more than 50. They cannot increase their exposure again until the Russell 3000’s 50 day moving average is positive. 

This sort of portfolio strategy is expensive. A long-short fund’s expenses come in the form of those it can control (fees paid to management) and those it cannot (expenses such as repayment of dividends generated by its short positions). At 3.1%, the fund is not cheap but the controllable fee, 1.7% after waivers, is well below the charges set by its average peer. With changing market conditions, it’s possible for the cost of shorting to drop well below 1% (and perhaps even become an income generator). With the adviser absorbing another 2% in expenses as a result of waivers, it’s probably unreasonable to ask for lower.

Bottom Line

Messrs. Moran and Johnson embrace Benjamin Graham’s argument that “The essence of investment management is the management of risks, not the management of returns.” With the stock market up 280% from its March 2009 lows, there’s rarely been a better time to hedge your gains and there’s rarely been a better team to hedge them with.

Fund website

ASTON / River Road Long-Short Fund. 

Disclosure

By way of disclosure, while the Observer has no financial relationship with or interest in Aston or River Road, I do own shares of ARLSX in my own accounts.

[cr2014]

THIS IS AN UPDATE OF THE FUND PROFILE ORIGINALLY PUBLISHED BY Fund Alarm IN May 2009. YOU CAN FIND THAT ORIGINAL PROFILE HERE.

Objective and strategy

The fund seeks long-term capital appreciation by investing in a diversified portfolio of very, very small North American companies.  They look for stocks that are “significantly undervalued” given fundamental accounting measures including book value, revenues, or cash flow.  They define themselves as “deep value investors.”  While the fund invests predominantly in microcap stocks, it does have the authority to invest in an all-cap portfolio if that ever seems prudent.  The portfolio is distinctive. It holds about 70 stocks and trades them half as often as its peers.  Its market cap is one-quarter that of its small-value peers.  89% of the portfolio is invested in US firms, with about 8% in Canadian and 3% in British firms.

Adviser

Aegis Financial Corporation of McLean, Virginia, is the Fund’s investment advisor. Aegis has been in operation since 1994 and has advised the fund since inception in 1998. It also manages more than 100 private accounts and Aegis High Yield (AHYFX).

Manager

Scott L. Barbee, CFA, is portfolio manager of the fund and a Managing Director of AFC. He was a founding director and officer of the fund and has been its manager since inception. He’s also a portfolio manager for Aegis High Yield and approximately 110 equity account portfolios of other AFC clients managed in an investment strategy similar to the Fund with a total value of approximately $100 million. Mr. Barbee received an MBA degree from the Wharton School at the University of Pennsylvania.

Strategy capacity and closure

Aegis Value closed to new investors in late 2004, when assets in the fund reached $750 million.  The manager estimates that, under current conditions, the strategy could accommodate nearly $1 billion.  It is currently about $410 million when separate accounts are included.

Management’s stake in the fund

As of September 30, 2013, Aegis employees owned more than $20 million of Fund shares. The vast majority of that investment is held by Mr. Barbee and his family.  Each of the fund’s directors, though very modestly compensated, has a large stake in the fund.

Opening date

May 15, 1998

Minimum investment

$10,000 for regular accounts and $5,000 for retirement accounts.

Expense ratio

1.50% on assets of $332 million, as of June 2023. 

Comments

Aegis Value must surely give the folks at Morningstar a headache.  It’s been a one-star fund, it’s been a five-star fund and it’s been everything in-between.  Its assets in 2009 were a tenth of what they were in 2004 but its assets now are nearly six times what they were in 2009.

That is, on face, a very odd pattern for a very consistent fund.  It’s had the same manager, Scott Barbee, since launch.  He’s pursued the same investing discipline and he’s applied to it the same small universe of stocks.

What might you need to know about Aegis Value as you undertake your due diligence?  Three things come immediately to mind.

First, the fund has the potential to make a great deal of money for its investors.  A $10,000 investment made at the fund’s 1998 launch would have grown to $59,800 by late November 2013.  That same investment in its small value peers would have grown to $34,900.  That translates to an annualized return of 12.2% since inception here, 8.0% at the average small-value fund.  That’s not a perfectly fair comparison, ultra-small companies are different: benchmarking them against either small- or micro-cap companies leads to spurious conclusions.  By way of simple example, Aegis completely ignored the bear market for value stocks in the late 1990s and the bear market for everybody else at the beginning of this century.  Since inception, it has handsomely outperformed other ultra-small funds, such as Franklin Microcap Value (FRMCX) and Bridgeway Ultra-Small Company Market (BRSIX).  In the past five years, its total return has been almost 2:1 greater than theirs.

Second, ultra-small companies are explosive.  Over the past five years, the fund has booked double-digit quarterly returns on 11 occasions.  It has risen by as much as 48% in three months and has fallen by as much as 20%.   During the October 2007 – March 2009 meltdown, AVALX lost 68.9%.  That did not reflect the fundamental values of the underlying stocks as much as fallout from Then, in the six months following the March 2009 low, AVALX returned 230%.  That sort of return is entirely predictable for tiny, deep-value companies following a recession.  For the first years ending November 2013, the fund earned an annualized 31.6% per year.

Third, there’s reason to approach – but to approach with caution – now.  There’s a universal recognition that valuations in the small cap space are exceedingly rich right now.  Mr. Barbee’s last letter to shareholders (Q3 2013) warns that Fed policy is “starting to form asset bubbles.”  For a deep value investor, a rising market is never a friend and he frets that “the third quarter saw a significant decline in watch-list candidates, from 270 at the end of just to 224 at the end of September.  There is now significantly more competition for the opportunities that do exist and our job is clearly becoming more challenging.” 

Microcaps represent a large and diverse universe whose members are frequently mispriced.  Given his skepticism about the consequences of fed policy and a surging market, like other deep value/absolute return managers, he is gravitating toward “hard asset enterprises” and – reluctantly – cash.  In general, he would prefer not to hold cash since it doesn’t hold value when inflation rises.  He avers that “to date, our experienced team has been able to find a sufficient number of investment candidates offering what we believe are attractive risk/reward characteristics.” Nonetheless he’s cautious enough about seeking “deeply” undervalued stocks that the portfolio is up to about 16% cash.

Bottom Line

With Aegis’s pending reorganization, this might be an opportune time for investors to look again at one of the most distinctive, successful microcap value funds around.  Mr. Barbee is one of the field’s longest tenured managers and Aegis sports one of its longest records.  Both testify to the fact that steadfast investors here have had their patience more than adequately rewarded.

Fund website

Aegis Value fund.  It’s largely a one-page site, so you’ll have to scroll down to see the links to the various fund documents and reports.  The Annual and Semi-Annual Reports are pretty formulaic, but the quarterly manager letters are worth some time and attention.

[cr2013]

Objective and Strategy

The fund pursues long-term capital appreciation. They define themselves as conservative value investors whose first strategy is “do not lose money.” As a result, they spend substantial time analyzing and minimizing the downside risks of their investments. They generally invest in a fairly compact portfolio (around 30 names) of U.S. common stocks. They start with a series of quantitative screens (including the acquisition value of similar companies and the firms’ liquidation value), then examine the ones that pass for evidence of fiscal responsibility (balance sheets without significant debt), excellent management, a quality business, and a cheap stock price. They believe themselves to have three competitive advantages: (1) they are willing to invest in firms of all sizes. (2) They’re vigilant for factors which the market systematically misprices, such as firms whose balance sheets are stronger than their income statements and special situations, such as spin-offs. And (3) they’re small enough to pursue opportunities unattractive to managers who are moving billions around.

Adviser

Frank Capital Partners, LLC. Monique M. Weiss and Brian J. Frank each own 50% of the adviser.

Manager

Brian Frank is Frank Capital Partners’ co-founder, president and chief investment officer. He’s been interested in stock investing since he was a teenager and, like many entrepreneurial managers, was a voracious reader. At 19, his grandfather gave him $100,000 with the injunction, “buy me the best stocks.” In pursuit of that goal, he founded a family office in 2002, an investment adviser in 2003 and a mutual fund in 2004. He was portfolio co-manager from 2004 – 2009 and has been sole manager since November, 2009. He earned degrees in accounting and finance from New York University’s Stern School of Business. As of the latest SAI, Mr. Frank manages one other investment account, valued at around $8 million.

The Frank Value Fund has seven times been awarded as a Wall Street Journal Category King in the Multi-cap Core Category.

Strategy capacity and closure

Mr. Frank reports “This strategy has a capacity max of around $5 billion in assets. We will seriously examine our effect on our smallest market cap position as early as $1 billion of assets. We will close the fund before we are forced out of smaller or less liquid names. We are committed to maintaining superior returns for shareholders.”

Management’s Stake in the Fund

Mr. Frank has between $100,000 and 500,000 invested in the fund. All of the fund’s trustees have substantial investments (between $10,000 and 50,000) in the fund, especially given the modest compensation ($400/year) they receive for their service.

Opening date

July 21, 2004

Minimum investment

$1500. The fund is available through Schwab, NFS, Pershing, Commonwealth, JP Morgan, Matrix, SEI, Legent, TD Ameritrade, E-Trade, and Scottrade.

Expense ratio

1.37% on assets of $18.9 million (as of July 2023)

Comments

If a fund manager approached you with the following description of his investment discipline, how would you react?

We generally ignore two out of every three opportunities to make gains for our investors. Our discipline calls for us to periodically pour money into the most egregiously overpriced corner of the market, often enough into ideas that would be pretty damned marginal in the best of circumstances. ‘cause that’s what we’re paid to do.

Yuh.

Brian Frank reacts in about the same way you did: admiration for their painful honesty and stupefaction at their strategy. As inexplicably dumb as this passage might sound, it’s descriptive of what you’ve already agreed to when you buy any of hundreds of large mainstream domestic equity funds.

Mr. Frank believes that a manager can’t afford to ignore compelling opportunities in the name of style-box purity. The best opportunities, the market’s “fat pitches,” arise in value and growth, large and small, blue-chip and spinoff. He’s intent on pursuing each.

Most funds that claim to be “all cap” are sorting of spoofing you; most mean “a lot of easily-researched large companies with the occasional SMID-cap tossed in.” To get an idea of how seriously Mr. Frank means “go anywhere” when he says “go anywhere,” here’s his Morningstar portfolio map in comparison to that of the Vanguard Total Stock Market Index Fund (VTSMX):

Vanguard Total Stock Market Index	Frank Value

Nor is that distribution static; the current style map is modestly more focused on growth than last quarter’s was and there have been years with a greater bulge toward small- and micro-caps. But all versions show an incredibly diverse coverage.

Those shifts are driven by quantitative analyses of where the market’s opportunities lie. Mr. Frank writes:

What does the large-cap growth or small-cap value manager do when there are no good opportunities in their style box? They hold cash, which lowers your exposure to the equity markets and acts as a lead-weight in bull markets, or they invest in companies that do not fit their criteria and end up taking excess risk in bear markets. Neither one of these options made any sense when I was managing family-only money, and neither one made sense as we opened the strategy to the public … Our strategy is quantitative, meaning we go where we can numerically prove to ourselves there is opportunity. If there is no opportunity, we leave the space.

That breadth does not suggest that FRNKX is a closet indexer. Far from it. Morningstar categorizes equity portfolios into eleven sectors (e.g., tech or energy). At its last portfolio report, Mr. Frank had zero investing in four of the sectors (materials, real estate, energy, utilities) and diverged from the index weighting by 50% or more in three others (overweighting financial services and tech, underweighting consumer stocks).

Because the fund is small and the portfolio is focused, it can also derive substantial benefit from opportunities that wouldn’t be considered in a huge fund. He’s found considerable value when small firms are spun-off from larger ones. Two of three recent purchases were spinoffs. New Newscorp was spun-off from Rupert Murdoch’s Newscorp and, while little noticed, the “mishmash of global assets in New Newscorp, represent[s] one of the best upside/downside scenarios we have seen in a long time.” Likewise with CST Brands, a gas station and convenience store operator spun off from Valero Energy.

At the same time, Mr. Frank has a knack for identifying the sorts of small firms with unrecognized assets and low prices that eventually attract deep-pocket buyers.  He reports that “About 1 out of every 4 companies we sell is to a private equity or strategic buyer. So yes, our turnover is significantly influenced by take-outs. YTD take-outs have been DELL, BMC, and TRLG (True Religion Jeans.)”

All of this would qualify as empty talk if the manager couldn’t produce strong results, and produce them consistently.   Happily for its investors – including Mr. Frank and his family – the fund has produced remarkably strong, remarkably consistent returns.  It’s in the top tier of its peer group for trailing periods reaching back almost a decade.  The manager tracks his fund’s returns over a series of rolling five-year periods (08/2004-08/2009, 09/04-09/10 and so on).  They’ve beaten their benchmark in 45 of 45 rolling periods and have never had a negative five year span, while the S&P500 has had seven of them in the same period.  FRNKX has also outperformed in 80% of rolling three-year periods and from inception to September 2013.  That led Lipper to designate the fund as a Lipper Leader for both Total Return and Capital Preservation for every reported period.

Bottom Line

Winning is hard.  Winning consistently is incredibly hard.  Winning consistently while handicapping yourself by systematically, structurally excluding opportunities approaches impossible.  Frank Value has, for almost a decade, won quietly and consistently  While there are no guarantees in life or investing, the manager has worked hard to tilt the odds in his investors’ favor. 

Fund website

Frank Funds

Fact Sheet

Objective and Strategy

The fund pursues long-term capital appreciation by investing in international stocks, which might include companies headquartered in the US but having more than half of their business outside of the US.   The vast bulk of the portfolio – 85% or so – are in small- to mid-cap stocks and about 5% is in cash. They will generally invest fewer than 25% of their assets in emerging markets.

Adviser

Oberweis Asset Management Inc. Established in 1989, OAM is headquartered in suburban Chicago.  Oberweis is an independent investment management firm that invests in growth companies around the world. It specializes in small and mid-cap growth strategies globally for institutional investors and its six mutual funds. They have about $700 million in assets under management.

Manager

Ralf A. Scherschmidt, who has managed the fund since its inception. He joined Oberweis in late 2006.  Before that, he served as an equities analyst at Jetstream Capital, LLC, a global hedge fund, Aragon Global Management LLC, Bricoleur Capital Management LLC and NM Rothschild & Sons Limited.  His MBA is from Harvard, while his undergrad work (Finance, Accounting and Chinese) was completed at Georgetown. Ralf grew up and has work experience in Europe and the UK, and has also lived in South Africa, China and Taiwan. Mr. Scherschmidt oversees nearly $200 million in five other accounts.  He’s supported by three analysts who have been with Oberweis for an average of six years.

Strategy capacity and closure

Oberweis manages between $300-400 million dollars using this strategy, about 25% of which is in the fund.  The remainder is in institutional separate accounts.  The total strategy capacity might be $3 billion, but the advisor is contractually obligated to soft-close at $2.5 billion. They have the option of soft closing earlier, depending on their asset growth rate.  Oberweis does have a track record for closing their funds early.

Management’s Stake in the Fund

As of December 31, 2012, Mr. Scherschmidt had between $100,000-500,000 invested in the fund.  Three of the fund’s four trustees have some investment in the fund, with two of them being over $10,000.  As of March 31, 2013, the officers and Trustees as a group owned 5.07% of the fund’s shares.

Opening date

February 1, 2007.

Minimum investment

$1000, reduced to $500 for IRAs and $100 for accounts established with an automatic investing plan.  The fund is available through all major supermarkets (E Trade, Fidelity, Price, Schwab, Scottrade, TD Ameritrade and Vanguard, among others).

Expense ratio

1.6% on assets of $133.6 million (as of July 2023).

Comments

This is not what you imagine an Oberweis fund to be.  And that’s good.

Investors familiar with the Oberweis brand see the name and immediately think: tiny companies, high growth, high valuations, high volatility, high beta … pure run-and-gun offense.  The 76% drawdown suffered by flagship Oberweis Emerging Opportunities (OBEGX) and 74% drop at Oberweis Microcap (OBMCX) during the 2007-2009 meltdown is emblematic of that style.

OBIOX isn’t them. Indeed, OBIOX in 2013 isn’t even the OBIOX of 2009. During the 2007-09 market trauma, OBIOX suffered a 69.7% drop, well worse than their peers’ 57.7% decline. The manager was deeply dissatisfied with that performance and took concrete steps to strengthen his risk management disciplines.  OBIOX is a distinctive fund and seems to have grown stronger.

The basic portfolio construction discipline is driven by the behavioral finance research.  That research demonstrates that people, across a range of settings, make very consistent, predictable errors.  The management team is particularly taken by the research synthesized by Dan Ariely, in Predictably Irrational (2010):

We are not only irrational, but predictably irrational … our irrationality happens the same way, again and again … In conventional economics, the assumption that we are all rational implies that, in everyday life, we compute the value of all the options we face and then follow the best possible path of action … But we are really far less rational than standard economic theory assumes.  Moreover, these irrational behaviors of ours are neither random nor senseless. They are systematic and, since we repeat them again and again, predictable.

This fund seeks to identify and exploit just a few of them.

The phenomenon that most interests the manager is “post-earnings announcement drift.”  At base, investors are slow to incorporate new information which contradicts what they already “know” to be true.  If they “know” that company X is on a downward spiral, the mere fact that the company reports rising sales and rising profits won’t quickly change their beliefs.  Academic research indicates, it often takes investors between three and nine months to incorporate the new information into their conclusions.  That presents an opportunity for a more agile investor, one more adept at adapting to new facts, to engage in a sort of arbitrage: establish a position ahead of the crowd and hold until their revised estimations close the gap between the stock’s historic and current value. 

This exercise is obviously fraught with danger.  The bet works only if four things are all true:

• The stock is substantially mispriced
• You can establish a position in it
• Other investors revise their estimations and bid the stock up
• You can get out before anything bad happens.

The process of portfolio construction begins when a firm reports unexpected financial results.  At that point, the manager and his team try to determine whether the stock is a value trap (that is, a stock that actually deserves its ridiculously low price) or if it’s fundamentally mispriced.  Because most investors react so slowly, they actually have months to make that determination and establish a position in the stock. They work through 18 investment criteria and sixteen analytic steps in the process. From a 4500 stock universe, the fund holds 50-90 funds.  They have clear limits on country, sector and individual security exposure in the portfolio.  As the stock approaches 90% of Oberweis’s estimate of fair value, they sell. That automatic sell discipline forces them to lock in gains (rather than making the all-too-human mistake of falling in love with a stock and holding it too long) but also explains the fund’s occasionally very high turnover ratio: if lots of ideas are working, then they end up selling lots of appreciated stock.

There are some risk factors that the fund’s original discipline did not account for.  While it was good on individual stock risks, it was weak on accounting for the possibility that there might be exposure to unrecognized risks that affects many portfolio positions at once.  Oberweis’s John Collins offered this illustration:

If we own a Canadian chemical company, a German tech company and a Japanese consumer electronics firm, it sounds very diversified. However, if the Canadian company gets 60% of their revenue from an additive for rubber used in tires, the German firm makes a lot of sensors for engines and the Japanese firm makes a lot of car audio and navigation systems, there may be a “blind bet” in the auto sector we were unaware of.

As a result, a sudden change in the value of the euro or of a barrel of crude oil might send a shockwave rippling through the portfolio.

In January 2009, after encountering unexpectedly large losses in the meltdown, the fund added a risk optimizer program from Empirical Research Partners that performs “a monthly MRI of the portfolio” to be sure the manager understands and mitigates the sources of risk.  Since that time, the fund’s downside capture performance improved dramatically.  It used to be in the worst 25% of its peer group in down markets; it’s now in the best 25%. 

Bottom Line

This remains, by all standard measures, a volatile fund even by the standards of a volatile corner of the investment universe.  While its returns are enviable – since revising its risk management in January 2009, a $10,000 investment here would have grown to $35,000 while its average peer would have grown to $24,000 – the right question isn’t “have they done well?”  The right questions are (1) do they have a sustainable advantage over their peers and (2) is the volatility too high for you to comfortably hold it?  The answer to the first question is likely, yes.  The answer to the second might be, only if you understand the strategy and overcome your own behavioral biases.  It warrants further investigation for risk-tolerant investors.

Fund website

Oberweis International Opportunities.

2022 Semi-Annual Report

 [cr2013]

Objective and Strategy

Beck, Mack & Oliver Partners Fund seeks long term capital appreciation consistent with the preservation of capital. It is an all-cap fund that invests primarily in common stock, but has the ability to purchase convertible securities, preferred stocks and a wide variety of fixed-income instruments.  In general, it is a concentrated portfolio of foreign and domestic equities that focuses on finding well-managed businesses with durable competitive advantages in healthy industries and purchasing them when the risk / reward profile is asymmetric to the upside.

Adviser

Beck, Mack & Oliver LLC, founded in 1931. The firm has remained small, with 25 professionals, just seven partners and $4.8 billion under management, and has maintained a multi-generation relationship with many of its clients.  They’re entirely owned by their employees and have a phased, mandatory divestiture for retiring partners: partners retire at 65 and transition 20% of their ownership stake to their younger partners each year.  When they reach 70, they no longer have an economic interest in the firm. That careful, predictable transition makes financial management of the firm easier and, they believe, allows them to attract talent that might otherwise be drawn to the hedge fund world.  The management team is exceptionally stable, which seems to validate their claim.  In addition to the two BM&O funds, the firm maintains 670 “client relationships” with high net worth individuals and families, trusts, tax-exempt institutions and corporations.

Manager

Zachary Wydra.  Mr. Wydra joined Beck, Mack & Oliver in 2005. He has sole responsibility for the day-to-day management of the portfolio.  Prior to joining BM&O, Mr. Wydra served as an analyst at Water Street Capital and as an associate at Graham Partners, a private equity firm. In addition to the fund, he manages the equity sleeve for one annuity and about $750 million in separate accounts.  He has degrees from a bunch of first-rate private universities: Brown, Columbia and the University of Pennsylvania.

Strategy capacity and closure

The strategy can accommodate about $1.5 billion in assets.  The plan is to return capital once assets grow beyond the optimal size and limit investment to existing investors prior to that time.  Mr. Wydra feels strongly that this is a compounding strategy, not an asset aggregation strategy and that ballooning AUM will reduce the probability of generating exceptional investment results.  Between the fund and separate accounts using the strategy, assets were approaching $500 million in August 2013.

Management’s Stake in the Fund

Over $1 million.  The fund is, he comments, “a wealth-creation vehicle for me and my family.”

Opening date

December 1, 2009 for the mutual fund but 1991 for the limited partnership.

Minimum investment

$2500, reduced to $2000 for an IRA and $250 for an account established with an automatic investment plan

Expense ratio

1.0%, after waivers on assets of $50.7 million, as of June 2023. 

Comments

One of the most important, most approachable and least read essays on investing is Charles Ellis, The Loser’s Game (1977).  It’s funny and provocative and you should read it in its entirety.  Here’s the two sentence capsule of Ellis’s argument:

In an industry dominated by highly skilled investors all equipped with excellent technology, winners are no longer defined as “the guys who perform acts of brilliance.”  Winners are defined as “the guys who make the fewest stupid, unnecessary, self-defeating mistakes.”

There are very few funds with a greater number or variety of safeguards to protect the manager from himself than Beck, Mack & Oliver Partners.  Among more than a dozen articulated safeguards:

• The advisor announced early, publicly and repeatedly that the strategy has a limited capacity (approximately $1.5 billion) and that they are willing to begin returning capital to shareholders when size becomes an impediment to exceptional investment performance.
• A single manager has sole responsibility for the portfolio, which means that the research is all done (in-house) by the most senior professionals and there is no diffusion of responsibility.  The decisions are Mr. Wydra’s and he knows he personally bears the consequences of those decisions.
• The manager may not buy any stock without the endorsement of the other BM&O partners.  In a unique requirement, a majority of the other partners must buy the stock for their own clients in order for it to be available to the fund.  (“Money, meet mouth.”)
• The manager will likely never own more than 30 securities in the portfolio and the firm as a whole pursues a single equity discipline.  In a year, the typical turnover will be 3-5 positions.
• Portfolio position sizes are strictly controlled by the Kelly Criterion (securities with the best risk-reward comprise a larger slice of the portfolio than others) and are regularly adjusted (as a security’s price rises toward fair value, the position is reduced and finally eliminated; capital is redeployed to the most attractive existing positions or a new position).
• When the market does not provide the opportunity to buy high quality companies at a substantial discount to fair value, the fund holds cash.  The portfolio’s equity exposure has ranged between 70-90%, with most of the rest in cash (though the manager has the option of purchasing some fixed-income securities if they represent compelling values).

Mr. Wydra puts it plainly: “My job is to manage risk.” The fund’s exceedingly deliberate, careful portfolio construction reflects the firm’s long heritage.  As with other ‘old money’ advisors like Tweedy, Browne and Dodge & Cox, Beck, Mack & Oliver’s core business is managing the wealth of those who have already accumulated a fortune.  Those investors wouldn’t tolerate a manager whose reliance on hunches or oversized bets on narrow fields, place their wealth at risk.  They want to grow their wealth over time, are generally intelligent about the need to take prudent risk but unwilling to reach for returns at the price of unmanaged risk.

That discipline has served the firm’s, and the fund’s, investors quite well.  Their investment discipline seeks out areas of risk/reward asymmetries: places where the prospect of permanent loss of capital is minimal and substantial growth of capital is plausible. They’ve demonstrably and consistently found those asymmetries: from inception through the end of June 2013, the fund captured 101% of the market’s upside but endured less than 91% of its downside. To the uninitiated, that might not seem like a huge advantage.  To others, it’s the emblem of a wealth-compounding machine: if you consistently lose a bit less in bad times and keep a little ahead in good, you will in the long term far outpace your rivals.

From inception through the end of June, 2013, the strategy outpaced the S&P 500 by about 60 basis points annually (9.46% to 8.88%).  Since its reorganization as a fund, the advantage has been 190 basis points (15.18% to 13.28%).  It’s outperformed the market in a majority of rolling three-month periods and in a majority of three-month periods when the market declined.

So what about 2013?  Through late August, the fund posted respectable absolute returns (about 10% YTD) but wretched relative ones (it trailed 94% of its peers).  Why so? Three factors contributed.  In a truly defensive move, the manager avoided the “defensive” sectors that were getting madly bid up by anxious investors.  In a contrarian move, he was buying energy stocks, many of which were priced as if their industry was dying.  And about 20% of the fund’s portfolio was in cash.  Should you care?  Only if your investment time horizon is measured in months rather than years.

Bottom Line

Successful investing does not require either a magic wand or a magic formula.  No fund or strategy will win in each year or every market.  The best we can do is to get all of the little things right: don’t overpay for stocks and don’t over-diversify, limit the size of the fund and limit turnover, keep expenses low and keep the management team stable, avoid “hot” investments and avoid unforced errors, remember it isn’t a game and it isn’t a sprint.  Beck, Mack & Oliver gets an exceptional number of the little things very right.  It has served its shareholders very well and deserves close examination.

Fund website

Beck Mack & Oliver Partners

Fact Sheet

[cr2013]

THIS IS AN UPDATE OF THE FUND PROFILE ORIGINALLY PUBLISHED IN April 2012. YOU CAN FIND THAT PROFILE HERE.

Objective and strategy

Tributary Balanced Fund seeks capital appreciation and current income. They allocate assets among the three major asset groups: common stocks, bonds and cash equivalents. Based on their assessment of market conditions, they will invest 25% to 75% of the portfolio in stocks and convertible securities, and at least 25% in bonds. The portfolio is typically 70-75 stocks from small- to mega-cap and turnover is well under half of the category average.  They currently hold about 60 bonds.

Adviser

Tributary Capital Management.  At base, Tributary is a subsidiary of First National Bank of Omaha and the Tributary Funds were originally branded as the bank’s funds.  Tributary advises six mutual funds, as well as serving high net worth individuals and institutions.  As of June 30, 2013, they had about $1.3 billion under management.

Manager

David C. Jordan, since July 2013.  Mr. Jordan is the Managing Partner of Growth Equities for Tributary and has been managing portfolios since 1982.  He managed this fund from 05/2001 to 07/2010. He has managed four-star Growth Opportunities (FOGRX) since 1998 and two-star Large Cap Growth (FOLCX) since 2011.  Before joining Tributary, he managed investments at the predecessors to Bank One Investment Advisors, Key Trust of the Northwest, and Wells Fargo Denver.

Management’s stake in the fund

Mr. Jordan’s investments are primarily in equities (he reports having “more than half of my financial assets invested in the Tributary Growth Opportunities Fund which I manage”), but he recently invested over $100,000 in the Balanced fund. 

Strategy capacity and closure

The advisor has “not formally discussed strategy capacities for the Balanced Fund, believing that we will not have to seriously consider capacity constraints until the fund is much larger than it is today.”

Opening date

August 6, 1996

Minimum investment

$1000, reduced to $100 for accounts opened with an automatic investing plan.

Expense ratio

0.99%, after a waiver, on $78 million in assets (as of July 2023).  Morningstar describes the expenses as “high,” which is misleading.  Morningstar continues benchmarking FOBAX against “true” institutional functions with minimums north of $100,000.

Comments

The long-time manager of Tributary Balanced has returned.  In what appears to be a modest cost-saving move, Mr. Jordan returned to the helm of this fund after a three year absence. 

If his last stint with the fund, from 2001 – 2010, is any indication, that’s a really promising development.  Over the three years of his absence, Tributary was a very solid fund.  The fund’s three-year returns of 13.1% (through 6/30/2013) place it in the top tier of all moderate allocation funds.  Over the period, it captured more of the upside and a lot less of the downside than did its average peer.  Our original profile concluded with the observation, “Almost no fund offers a consistently better risk-return profile.”

One of the few funds better than Tributary Balanced 2010-2013 might have been Tributary Balanced 2001-2010.  The fund posted better returns than the most highly-regarded, multi-billion dollar balanced funds.  If you compare the returns on an investment in FOBAX and its top-tier peers during the period of Mr. Jordan’s last tenure here (7/30/2001 – 5/10/2010), the results are striking.

Tributary versus Vanguard Balanced Index (VBINX)?  Tributary’s better.

Tributary versus Vanguard STAR (VGSTX)?  Tributary.

Tributary versus Vanguard Wellington (VWELX)?  Tributary.

Tributary versus Dodge and Cox Balanced (DODBX)?  Tributary.

Tributary versus Mairs & Power Balanced (MAPOX)?  Tributary.

Tributary versus T. Rowe Price Capital Appreciation (PRWCX)?  Price, by a mile.  Ehh.  Nobody’s perfect and Tributary did lose substantially less than Cap App during the 10/2007-03/2009 market collapse.

Libby Nelson of Tributary Capital Management reports that “During that time period, David outperformed the benchmark in 7 out of 9 of the calendar years and the five and ten-year performance was in the 10th percentile of its Morningstar Peer Group.”  In 2008, the fund finished in the top 14% of its peer group with a loss of 22.5% while its average peer dropped 28%.  During the 18-month span of the market collapse, Tributary lost 34.7% in value while the average moderate allocation fund dropped 37.3%.

To what could we attribute Tributary’s success? Mr. Jordan’s answer is, “we think a great deal about our investors.  We know that they’re seeking a lower volatility fund and that they’re concerned with downside protection.  We build the portfolio from there.”

Mr. Jordan provided stock picks for the fund’s portfolio even when he was not one of the portfolio managers.  He’s very disciplined about valuations and prefers to pursue less volatile, lower beta, lower-priced growth stocks.  In addition, he invests a greater portion of the portfolio in less-efficient slices of the market (smaller large caps and mid-caps) which results in a median market cap that’s $8 billion lower than his peers.

Responding to the growing weakness in the bond market, he’s been rotating assets into stocks (now about 70% of the portfolio) and shortening the duration of the bond portfolio (from 4.5 years down to 3.8 years).  He reports, “Our outlook is for returns from bonds in the period ahead to be both volatile, and negative, so we will move further toward an emphasis on stocks, which also may be volatile, but we believe will be positive over the next twelve months.”

Bottom Line

The empirical record is pretty clear.  Almost no fund offers a consistently better risk-return profile.  That commitment to consistency is central to Mr. Jordan’s style: “We are more focused on delivering consistent returns than keeping up with momentum driven markets and securities.”  Tributary has clearly earned a spot on the “due diligence” list for any investor interested in a hybrid fund.

Fund website

Tributary Balanced

Fact Sheet

[cr2013]

THIS IS AN UPDATE OF THE FUND PROFILE ORIGINALLY PUBLISHED IN February 2012. YOU CAN FIND THAT PROFILE HERE.

Objective and Strategy

Global Opportunities pursues long-term capital growth by investing in a portfolio of global equities with a strong bias towards small- and micro-cap companies. Investments may include companies based in the U.S., developed foreign countries, and emerging/frontier markets. The portfolio has flexibility to adjust its investment mix by market cap, country, and sector in order to invest where the best global opportunities exist.  The managers expect to move towards 100-150 holdings (currently just over 200).

Adviser

Grandeur Peak Global Advisors is a small- and micro-cap focused global equities investment firm, founded in mid-2011, and comprised of a very experienced and collaborative investment team that worked together for years managing some of the Wasatch funds.  They advise three Grandeur Peak funds and one “pooled investment vehicle.”  The adviser passed $1 billion in assets under management in July, 2013.

Managers

Robert Gardiner and Blake Walker.   Robert Gardiner is co-founder, CEO and Director of Research for Grandeur Peak Global.  Prior to founding Grandeur Peak, he managed or co-managed Wasatch Microcap (WMICX), Small Cap Value (WMCVX) and Microcap Value (WAMVX, in which I own shares).  In 2007, he took a sort of sabbatical from active management, but continued as Director of Research.  During that sabbatical, he reached a couple conclusions: (1) global microcap investing was the world’s most interesting sector, and (2) he wanted to get back to managing a fund.  He returned to active management with the launch of Wasatch Global Opportunities (WAGOX), a global small/micro-cap fund.  From inception in late 2008 to July 2011 (the point of his departure), WAGOX turned a $10,000 investment into $23,500, while an investment in its average peer would have led to a $17,000 portfolio.  Put another way, WAGOX earned $13,500 or 92% more than its average peer managed.

Blake Walker is co-founder of and Chief Investment Officer for Grandeur Peak. Mr. Walker was a portfolio manager for two funds at Wasatch Advisors. Mr. Walker joined the research team at Wasatch Advisors in 2001 and launched his first fund, the Wasatch International Opportunities Fund (WAIOX) in 2005. He teamed up with Mr. Gardiner in 2008 to launch the Wasatch Global Opportunities (WAGOX).

Strategy capacity and closure

Grandeur Peak specializes in global small and micro-cap investing.  Their estimate, given current conditions, is that they could profitably manage about $3 billion in assets.  They could imagine running seven distinct small- to micro-cap funds and tend to close all of them (likely a soft close) when the firm’s assets under management reach about $2 billion.  The adviser has target closure levels for each current and planned fund.

Management’s stake in the fund

As of 4/30/2012, Mr. Gardiner had invested over $1 million in each of his funds, Mr. Walker had between $100,000 and 500,000 in each.  President Eric Huefner makes an argument that I find persuasive: “We are all highly vested in the success of the funds and the firm. Every person took a significant pay cut (or passed up a significantly higher paying opportunity) to be here.”   The fund’s trustees are shared with 24 other funds; none of those trustees are invested with the fund.

Opening date

October 17, 2011.

Minimum investment

The fund closed to new investors on May 1, 2013.  It remains open for additional investments by existing shareholders.

Expense ratio

1.34% on $674.2 million in assets (as of July 2023). 

Comments

As part of a long-established plan, Global Opportunities closed to new investors in May, 2013.  That’s great news for the fund’s investors and, with the near-simultaneous launch of Grandeur Peak Global Reach (GPROX/GPRIX), not terrible news for the rest of us.

There are three matters of particular note:

1. This is a choice, not an echo.  Grandeur Peak Global Opportunities goes where virtually no one else does: tiny companies across the globe.  Most “global” funds invest in huge, global corporations.  Of roughly 280 global stock funds, 90% have average market caps over $10 billion with the average being $27 billion.  Only eight, or just 3%, are small cap funds.  GPGOX has the lowest average market capitalization of any global fund (as of July, 2013). While their peers’ large cap emphasis dampens risk, it also tends to dampen rewards and produces rather less diversification value for a portfolio.
2. This has been a tremendously rewarding choice. While these are intrinsically risky investments, they also offer the potential for huge rewards.  The managers invest exclusively in what they deem to be high-quality companies, measured by factors such as the strength of the management team, the firm’s return on capital and debt burden, and the presence of a sustainable competitive advantage.  Together the managers have 35 years of experience in small cap investing and have done consistently excellent work.  From inception through June 30, 2013, GPGOX returned 23.5% per year while its peers have returned about 14.5%.  In dollar terms, a $10,000 investment at inception would have grown to $14,300 here, but only $12,500 in their average peer.
3. The portfolio is evolving.  While Global Opportunities is described in the prospectus as being non-diversified, the managers have never chosen to construct such a portfolio.  The fund typically holds more than 200 names spread over a couple dozen countries.  With the launch of its sibling Global Reach, the managers will begin slimming down the Global Opportunities portfolio.  They imagine holding closer to 100-150 names in the future here versus 300 or more in Global Reach. 

Eric Huefner, Grandeur Peak’s president, isn’t exactly sure how the evolution will change Global Opportunities long-term risk/return profile.  “There will be a higher bar” for getting into the portfolio going forward, which means fewer but larger individual positions, in the stocks where the managers have the greatest confidence.  A hundred or so 10-25 bps positions will be eliminated; after the transition period, the absolute minimum position size will be 35 bps and the targeted minimum will be 50 bps.  That will eliminate a number of intriguing but higher risk stocks, the fund’s so-called “long tail.”  While more-concentrated portfolios are generally perceived to be more volatile, here the concentration is achieved by eliminating a bunch of the portfolio’s most-volatile stocks.

Bottom Line

If you’re a shareholder here, you have reason to be smug and to stay put.  If you’re not a shareholder here and you regret that fact, consider Global Reach as a more diversified application of the same strategy.

Website

Grandeur Peak Global Opportunities. 

Grandeur Peak Funds Investment Process

Grandeur Peak Funds Annual Report

3/31/2023 Quarterly Fact Sheet

[cr2013]