Over the 18 years Robert Bergson has managed the Northern Small Cap Value Fund (NOSGX), he has navigated through just about every kind of market condition, which is probably why he's able to stay so calm during the current state of the financial markets.
"We're at a point in the cycle where we really do want to stay focused on avoiding the lower-quality stocks and finding the stocks we think are reasonably priced and have some demonstrated profitability," he said.
Mr. Bergson, 54, studied architecture in college and worked in real estate consulting before joining Northern Trust Asset Management in 1997, where he is now responsible for $4.4 billion across various small-cap strategies.
Jeff Benjamin: What type of investor should be investing in this fund?
Robert Bergson: I think the investors and our clients are looking for consistent returns and exposures and are willing to enjoy the appreciation of incremental sorts of returns, rather than looking for the home run one year and strike out the next.
JB: Your fund is up 9.5% so far this year, following a13.7% decline last year, both of which are better than the category average. But the 6.5% gain in 2017 lagged the category after beating the category in 2016 with gain of 27.9%. Is this an aggressive fund?
RB: I think we reflect the style objective. We're in small cap value style and we reflect the volatility within that part of the market.
JB: Can you sum up your investing style and approach to portfolio construction?
RB: I would call it a highly disciplined approach. We are risk conscious and I think that reflects our general philosophy about investing, which is that you should only take risk where you think you will get rewarded for it.
The discipline is to keep focused on where you think you can add the most value and avoid the areas where you don't.
We're bottom up, we're not going to try to make bets on individual sectors or style changes. We're not rotating through those sorts of style changes.
That discipline is important to us, and we use quantitative stock selection to help maintain that level of discipline.
JB: Morningstar lists this fund's annual turnover rate at 16%, which is very low. Is that by design?
RB: Indeed. Small cap investing has a number of differences to large cap investing. Perhaps the most critical difference is you have to recognize the higher cost of investing within the small cap market that might not be present in large cap.
A part of what we do is control those transaction costs wherever possible and being able to reduce turnover is an important part of that.
We've designed the stock selection strategy to be slower moving. We're trying to buy and hold where we can and avoid noise trades, as well as being willing to diversify portfolio holdings to between 400 and 600 securities.
That allows us to trade smaller pieces of a larger number of securities which theoretically reduces the cost of trading because we're not having to trade big chunks of a less liquid security.
JB: It's not uncommon for small cap managers to sometimes drift into larger-cap stocks when they see opportunities there. How important is it for you to stay in the small-cap space?
RB: We try to stay focused on small cap, and we know many of our competitors will drift into the mid cap space for various reasons. But we do try to remain focused within the small cap segment and that is by design.
We try to be within the range of our benchmark Russell 2000 Value Index.
JB: The latest public data show that the fund is heavily allocated to financials, technology and industrials. Why so much in those sectors?
RB: Exposures at the sector level are controlled relative to our benchmark, and typically we're within 2% of our benchmark.
Sector exposures are part of those uncompensated risks that we don't want to take.
JB: What risk controls does this fund have in place to keep volatility in check?
RB: I think one of the key differentiators in terms of volatility is that we have a pretty important quality bias in our stock selection methodology.
We try to avoid low quality stocks and by doing so we tend to reduce overall volatility.
We're also mindful of our relative return versus our benchmark. That helps us on a benchmark-relative volatility picture.
JB: You took over management of this fund just two months before September 11, 2001 and you also managed it through the 2008 financial crisis. As a portfolio manager, what did you learn from those kinds of extreme experiences?
RB: One of the things our clients have appreciated over the years is that in times of stress, the portfolio tends to hang in better than our competitors and the market as a whole.
If you think back to 2008, which on a relative basis was probably our best year, we were able to navigate that market stress because of the sorts of stock selection strategies we've used, including a focus on higher-quality stocks.
JB: Where are you seeing opportunities now?
RB: When we look at opportunities it's really the ability to take advantage of some of our natural inclinations to define those higher-quality stocks within all of the sectors.
JB: Where do you see risk in the markets?
RB: Credit conditions and the interest rate environment, in part because of the weight of financials within small cap value.
The ongoing flattening of the curve makes it tough for small cap banks to really break out of a low-margin environment.
There is some concern about the ability for small cap value in general to do well when there is an unfavorable interest rate environment.
JB: What's the biggest challenge of managing an active stock fund in the midst of a record bull market for equities that seems to favor passive investing?
RB: There's always this desire to be human and chase returns, or to try and get that last market run. But I think it's really important to stay true and be disciplined about what you're doing, about your long-term philosophy, and really be willing to keep that long-term view even as perhaps it might get a little choppier in the near term.