Even in the best of times, the vast number of small-cap stocks can challenge the savviest investor, says Matti von Turk, lead manager of American Century Small Cap Quantitative (ASQIX ). In the current bear market, von Turk says her quantitative approach -- using computer models to rank stocks based on various valuation and growth measures -- can uncover opportunities as well as help avoid the pitfalls in a universe of 2,000 stocks.
Von Turk's fund has generally escaped the steep losses of many small-cap blend funds this year. It generated a decent gain last year, when it sidestepped many struggling tech stocks and found promising areas like insurance and auto suppliers. The fund rose 4%, while its peers fell 3.2% in 2001. This year through August, American Century Small Cap was down 1.9%, vs. an 18.4% drop for its peers.
Based on risk and return characteristics over the past three years, Standard & Poor's has assigned the fund an overall rank of 4 STARS (5 is the highest). Bill Gerdes of Standard & Poor's Fund Advisor recently spoke with von Turk about her fund's investing strategy, top holdings, and portfolio moves. Edited excerpts from their conversation follow:
Q: What are the benefits of a quantitative approach to small-cap investing?
A:With our quantitative tools, we can search through a much larger universe -- about 2,000 companies -- than a single portfolio manager could. Because smaller companies tend to be less widely followed, our process allows us to make better comparisons based on the available information.
Q: What are the main features of your investment process?
A:We look for undervalued stocks with attractive fundamental characteristics. We use a proprietary stock-ranking model, followed by a portfolio-construction process. Our stock-ranking model ranks stocks according to their relative attractiveness, based on value factors such as price-to-forward-earnings [ratio] and price-to-trailing-earnings, and growth characteristics such as profitability.
In the portfolio-construction process, we decide how large a position to take in the names generated by the stock-ranking model.
Q: How do you avoid stocks that aren't likely to rebound?
A:We look out for companies with negative earnings growth and negative earnings revisions because they're usually value traps.
Q: How do you control risk?
A:We limit our industry weightings to no more than 1% away from those of our benchmark, the S&P 600 [small-cap stock index], and we limit our sector weightings to no more than 2% away from the benchmark. [Von Turk defines industries as the components of a sector.]
Q: What are the fund's largest sector positions?
A:We have about 53 industries in the fund. Our largest industry is banking, and our largest sector is consumer cyclicals, followed by technology, although we're basically neutral on technology vs. our benchmark.
Q: Is your process uncovering any broad industry trends?
A:It shows that the homebuilding and title-insurance industries [policies that protect real estate buyers from any outstanding liens against the property] are continuing to benefit from low interest rates. One notable title-insurance company is Fidelity National Financial (FNF ). Our process also shows that automobile suppliers are gaining from high auto sales. Attractive automobile suppliers include ArvinMeritor (ARM ) and Dura Automotive Systems (DRRA ).
Q: Why has the fund done better than most of its peers so far this year and last year?
A:Our process helped us to avoid many of the worst torpedoes in technology, since many tech companies didn't look attractive based on valuations, profitability, and growth.
From Standard & Poor's Fund Advisor