Still big upside for small-caps, says fund manager

FAM's Robert says plenty of value left in asset class; his small-cap fund invests only in a small number of companies

May 1, 2012 @ 1:49 pm

By Jeff Benjamin

Small caps
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Don't let the strong rally in small-caps fool you: There is still plenty of value to be found in smaller-company stocks, according to Marc Roberts, co-manager of the FAM Small Cap Investor Fund Ticker:(FAMFX).

While Mr. Roberts' pro-small-cap perspective might seem a little biased, he remains confident that the concentrated portfolio, which comprises about two dozen stocks, can navigate the highflying category.

The strategy concentrates on companies with market capitalizations from $50 million to $1 billion, but Mr. Roberts describes the “sweet spot” as those companies between $200 million and $750 million.

“With our bottom-up strategy, we know there are 4,000 to 5,000 companies in our cap range that could be considered for this fund,” he said.

Mr. Roberts manages the fund at Fenimore Asset Management Inc. along with company founder and chief executive Thomas Putnam. The fund was launched March 1 and currently has just $10 million in assets, but it is modeled after a private fund managed by the same team since 2008.

While the mutual fund and the private fund will be essentially managed in the same manner, the mutual fund currently has a 40% cash weighting as the co-managers gradually put the money to work.

“We have a pretty large inventory of names in terms of investment ideas, and in some cases, it's just a matter of them coming into our price range,” Mr. Roberts said. “That's a case where market volatility can be a big advantage to us.”

Contrary to what some might think, Mr. Roberts said the concentrated portfolio exposure is an advantage, as well as a Fenimore trademark.

“We think about mitigating risk with fewer holdings by trying to invest in high-quality companies that have extremely strong management teams, strong balance sheets, lots of cash on their balance sheets, and that we are buying on sale,” he said. “A lot of small-cap funds have so many stocks that they are almost closet indexes, but we are stock pickers.”

An example of where Mr. Roberts is finding value is Amerisafe Inc. Ticker:(AMSF), the fund's largest position.

“As a high-hazard, niche insurance company, they can charge a lot and are able to get good premiums because there can be some severe hazards,” he said.

Amerisafe stock is up 15% from the start of the year, which compares with an 11.1% gain for the S&P 500.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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