Portfolio Manager Perspectives

Jeff Benjamin

Quant turned $100K into $220M fund

Auer Growth Fund has registered just three negative years in past two decades; ‘very volatile process'

Mar 2, 2011 @ 3:12 pm

By Jeff Benjamin

If ever there was a case for sticking with a strategy, it can be found in the aptly named, $220 million Auer Growth Fund Ticker:(AUERX).

Although launched as an open-end mutual fund just three years ago, the fund's straightforward, quantitative tack dates back to 1987 and a $100,000 retirement account.

That original $100,000 account, supplemented by five additional investments of $2,000 each, grew to $32.8 million by the end of 2007 under the management of portfolio manager Bob Auer, founder of S.B. Auer Funds LLC.

In a rare exception, the Securities and Exchange Commission allowed Mr. Auer to include the 20-year audited performance history from 1987 through 2007 in the mutual fund's prospectus.

According to the prospectus, the strategy had just three negative years and underperformed the S&P 500 on a full-year basis five times.

The process, which Mr. Auer describes as “95% quantitative,” starts by applying three basic screens across a universe of virtually every publicly traded U.S. stock.

Mr. Auer is looking for price-to-earnings ratios of below 12, a 25% earnings-per-share growth rate and a 25% revenue growth rate.

Beyond that, some of the other screens filter out negative tangible book value and current assets below current liabilities.

The long-term track record speaks for itself, but Mr. Auer warns, “It's not smooth, and it can be very jerky.”

After whittling down from more than 8,000 potential companies, the portfolio currently holds 111 stocks of all shapes and sizes.

The holdings in the fund run the gamut from the $179 billion global mining company Vale SA Ticker:(VALE) to KSW Inc. Ticker:(KSW), a $24 million installer of heating and air conditioning systems.

Investors should brace for portfolio turnover of around 150% and some wild swings.

In 1998, for example, the strategy lost 17.6%, while the S&P gained 28.6%.

“In 1998, we had no dot-com stocks and that was working against us,” Mr. Auer said.

However, in 2003, the strategy gained 154.6%, making a 28.7% S&P gain look small by comparison.

“The strategy can be a very volatile process,” Mr. Auer said. “It's a very tough thing to stick with some stocks quarter-to-quarter and year-to-year.”

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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