Looking for a Spark
David Dabora is a bottom-up small-cap investor -- he looks for "value with a catalyst" in his stock selections. His $170 million Boston Partners Small Cap Value II (BPSCX ) has been handily beating its benchmark, the Russell 2000 Value Index. Last year, the fund soared 44.4%, while the index rose just 22.8%. Year-to-date through July 20, the fund gained about 39.3%, while the benchmark rose about 10.5%. The fund carries the highest Standard & Poor's three-year overall rank of 5 stars.
Dabora has managed the fund since inception in July 1998. The fund typically holds well over 100 names in the portfolio. The average price-to-earnings (p-e) ratio of the portfolio is 13.1. Financials, consumer services and tech stocks currently account for more than half of the fund's assets.
Palash Ghosh of Standard & Poor's FundAdvisor recently spoke with Dabora about the fund's investing strategy, its top holdings and recent portfolio moves. Edited excerpts from their conversation follow:
Q: How large is the fund currently? A:
Q: How large is the fund currently?
A:We have just over $170 million in net assets comprising 146 stocks.
Q: How do you select funds? What are your buy criteria? A:
Q: How do you select funds? What are your buy criteria?
A:We generally focus on stocks with market caps below $1 billion -- this universe currently consists of about 5,500 companies. We look for stocks that, in our determination, are undervalued, have sound business fundamentals, and possess some catalyst, which will unlock that value.
Our investment process is 10% quantitative in nature and the remaining 90% consists of fundamental analysis. Our process is strictly bottom-up, and we use a large team of analysts.
Q: Do you generally keep so many holdings in the portfolio? A:
Q: Do you generally keep so many holdings in the portfolio?
A:We've typically kept well over 100 stocks in the fund -- usually around 150. As we invest in small-cap companies, there is risk in individual selections, so to control risk we like to maintain a large number of issues. We eventually want this product to grow in asset size to about $600 or $800 million.
Q: Are you a "deep value" investor, or are you more of a "relative value" investor? A:
Q: Are you a "deep value" investor, or are you more of a "relative value" investor?
A:I'd say we are "value with a catalyst" -- while we are concerned about the price we pay, we have to balance the price profitability and underlying projected growth. For example, if a company is trading at a p-e of 18 to 20 and has 35% sustainable annual growth -- well, this is definitely a good deal. Conversely, if a stock trades at 13 or 14 times earnings but has no growth -- that's not a very attractive company.
Q: What are your five largest holdings? A:
Q: What are your five largest holdings?
A:Navigant Consulting (NCI ), Mutual Risk Management (MM ), Network Associates (NETA ), Modis Professional Services (MPS ) and Monaco Coach (MNC ).
Q: Can you take some of your large holdings and discuss how they illustrate your investment style? A:
Q: Can you take some of your large holdings and discuss how they illustrate your investment style?
A:Navigant has doubled in price since the beginning of the year -- they're primarily in energy-based consulting to utilities businesses and in the financial bankruptcy/litigation area. A new management team came in last year and pared down the company's focus on these two areas. Navigant currently has a $250 million market cap, with a solid balance sheet, nice top-line growth, no net debt, about $30 million in net cash, and they generate $250 million in revenue. Their business is picking up, particularly in light of what's going on here in California with all the litigation arising from the power crisis. The stock is still cheap and remains ignored by Wall Street. We initially bought Navigant at the start of 2001.
Monaco Coach is a leading manufacturer of motor-coaches, like RVs. The company is very well positioned -- they've been taking market share away from their industry rivals. They have very little debt and generate high return-on-equity. As baby-boomers age and purchase these kinds of vehicles, the company has a great long-term outlook. We initially bought the stock late in 2000 when it was weakened by concerns for the overall economy-- we initially purchased at under $20, it's now at about $30.
Q: What is your benchmark? A:
Q: What is your benchmark?
A:The Russell 2000 Value Index.
Q: Relative to that benchmark, what is your fund's average market cap and valuation? A:
Q: Relative to that benchmark, what is your fund's average market cap and valuation?
A:Our weighted average market cap is $593.4 million versus $776.2 million for the index, while our median market cap is $389.7 million vs. $416.4 million for the index. With regards to the average market cap, we're probably below that of the Index because we have about a dozen or so companies with market caps below $100 million.
The average p-e for both the fund and the index is 13.1. Although we invest on an individual, stock-by-stock basis, our goal on the valuation side is to match the index p-e or be a bit below it. In general, we've had an average p-e lower than that of the benchmark.
Q: What are your largest sectors? A:
Q: What are your largest sectors?
A:As of June 30, 2001: finance, 22.1%; consumer services, 20.5%; technology, 10.4%; consumer non-durables, 6.9%; and consumer durables, 6.6%.
Q: Do you seek to match the sector allocations of the index? A:
Q: Do you seek to match the sector allocations of the index?
A:Our sector allocation is simply the function of our bottom-up stock selection process. However, we do impose some controls -- for example, we will not allow any one sector to account for more than 35% of the fund's assets. Moreover, no individual holding can represent more than 5% of the portfolio -- but, actually, it's rare for any one stock to weigh more than 3%.
Q: Was your exposure to technology stocks higher in 1999 and early 2000 when the overall market was driven by surging techs? A:
Q: Was your exposure to technology stocks higher in 1999 and early 2000 when the overall market was driven by surging techs?
A:Our tech exposure was actually lower back then than it is today. This is logical. Back in 1999 and early 2000, tech stocks were too richly priced -- as a "value" investor, we became more attracted to them as prices declined. Going forward, if techs continue to slide, we'll likely raise our exposure in this space.
In 2000, we got strong returns from what I would call "low-tech tech" stocks -- i.e, payment processing companies such as Global Payments (GPN ) and National Processing (NAP ), which we have since sold out of; as well eFunds Corp. (EFDS ) and Deluxe Corp. (DLX ). One of our current major holdings, Network Associates, is a leading supplier of network security and management software products -- it has $600-$700 million in revenue, no debt, a new management team. It has doubled in price since we purchased it. We have been quite selective with tech; although it hasn't accounted for a huge portion of our assets, our tech stocks have been up 30% on an annualized basis over the past three years.
Q: What are your sell criteria? A:
Q: What are your sell criteria?
A:We sell when a stock reaches a pre-determined price target, or when fundamentals deteriorate, or when the catalyst that we initially identified no longer is applicable.
Q: What is your annual portfolio turnover? A:
Q: What is your annual portfolio turnover?
A:It was about 120% over the trailing 12 months -- we trade more than the average small-cap value portfolio. This also reflects the fact that over the past year, small-cap value stocks in general have performed quite well -- that is, many have quickly reached their price targets. A vast majority of our sales have been due to this. We, do, however, expect to hold a stock for 18 months when we first buy it.
From Standard & Poor's FundAdvisor