Mike Fasciano's small-cap stock fund is doing well for investors, up 12 per cent so far this year. But it is trailing its peer group by nearly that much, as small caps leapt in this year's tech-led rally in equity markets.And that's fine with him.
Mr Fasciano, who manages the Neuberger Fasciano Fund, looks for companies that are growing at 12-15 per cent a year, but above all prizes stable businesses with very consistent cash flow, and which are not subject to the changing winds of the economy.
"This is a portfolio for all seasons," he said. "We're not trying to time growth and value cycles," he added, explaining why he did not hop on the tech bandwagon, as did many other investors, hoping that the US economy is finally set for a second-half recovery.
Although it misses the highs, his low-risk, high-quality strategy has paid off by losing far less investor money than its more aggressive rivals in down markets.
In the fund's 16-year history, it has had just two losing years. In 1990, the fund slipped 1 per cent, while the benchmark Russell 2000 fell 20 per cent. Last year the Russell 2000 skidded 21 per cent, while the fund shed 8 per cent.
In keeping with his strategy, Mr Fasciano's preferred company tends to be in relatively pedestrian businesses, with high recurring revenues. Favourite picks include companies with consumable or disposable products, which he says makes for a more predictable and sustainable growth rate.
Mr Fasciano likes the dental business because of the increasing attention to oral hygiene and cosmetic dentistry.
Other top picks have lots of contractual sales, such as subscription sales, or monthly services.
Another favourite is Plantronics, the maker of telephone headsets, which has a large profitable call centre business.
The business generates consistent free cash flow, and is growing through the increasing acceptance of headsets.
Although the fund invests in small-cap companies, which range from $100 million (€92 million) to $1.5 billion, he prefers companies on the larger end of that scale. He said the average portfolio market cap of $1 billion means he owns companies "with more meat on their bones".
"We like broader product lines and deeper management," he said.
He noted that small-cap stocks already carry liquidity and volatility risk. So he aims to mitigate that by buying shares in the highest quality, most stable companies he can. Free cash flow and above-industry average return on capital are two key qualities he looks for. He is also looking for companies that can double their size in his three- to five-year timeframe. - (Financial Times Service)
