LIPPER: These small funds are big performers

NEW YORK, March 9 Fri Mar 9, 2012 12:00am EST

NEW YORK, March 9 (Reuters) - It would be natural for a small-firm portfolio manager like George Davis to feel a little intimidated by the likes of the Vanguard Group and Fidelity Investments.

To those industry titans the $16 billion under management at his Los Angeles-based firm, Hotchkis & Wiley, is spare change they might find in their couch cushions.

But Davis is anything but cowed.

"I like the size of the firm right now," he said. "It's actually a good mix, having strong resources with about 20 investment professionals, but being flexible enough to stay nimble in the markets."

His firm's performance bears out his confidence. Hotchkis & Wiley prevailed Thursday and won top honors in Lipper's Best Equity-Small Fund Group category, based on the strong three-year risk-adjusted performance of its menu of funds. That's the second year in a row the firm took home a prize from Lipper, a Thomson Reuters company.

Four other modest-sized fund shops, with less than $40 billion in assets, laid claim to Lipper awards as well. They were M&I Investment Management (recently purchased by BMO), for Small Company Fixed Income; Delaware Management, for Small Company Mixed Assets, and GuideStone Capital Management, for Small Company Overall.

"Smaller firms tend to stay truer to their knitting," says Tom Roseen, head of research services at Lipper, of the tiny powerhouses. "They're able to operate under the radar, which can be very profitable for investors. You also get a different touch: You might get portfolio managers putting postage on envelopes, or CEOs picking up their own phones. It's because they really love what they're doing."

With Hotchkis & Wiley, Davis attributes the firm's success to a disciplined, value-oriented approach, which strives to look beyond the economic data point du jour. In that sense the manic market of recent years, seemingly buffeted by every single euro zone rumor, actually played to the firm's advantage.

"The market's been swinging dramatically given all the big headlines," says Davis, who likes equities' prospects for 2012 given last year's flat market. "But corporate earnings have been coming through nicely, balance sheets are in great shape, and valuations are actually very appealing to us right now."

The other Lipper small-company winners haven't let modest size get in the way of portfolio gains, either.

Reigning atop the Mixed Assets category, Philadelphia-based money manager Delaware spices a bottom-up analysis of individual securities with some macro thinking on asset allocation.

"When conditions warrant, we can tactically shift our exposures over time from a top-down perspective as well," says Mike Hogan, Delaware's executive vice president and head of equity investments. "Both of those approaches have added value for us."

The flavor of Hogan's macro thinking at the moment: That the U.S. economy seems to be stabilizing, with housing bottoming out and the Federal Reserve providing plenty of liquidity.

But the political intractability in Washington gives him pause, as does an unresolved European debt mess and slowing Chinese growth. Those question marks have him avoiding too much risk, until portfolio managers can get more clarity about how things are going to play out over coming years.

It's that kind of longer-term thinking that Hogan credits for Delaware's consistent out performance.

"We have much lower turnover in our portfolios than a lot of our peers, because we're not just chasing short-term price momentum," he says. "The long-term view has really been neglected in the U.S. market, because everyone else is focusing on week-to-week indicators."

The irony of being a small and successful fund shop, though, is that you may soon draw more assets and have to expand in a hurry. And that, in turn, can lead to growing pains. Janus, for example, went from having modest assets under management to becoming one of the largest fund families in the country in the late 1990s, thanks to its big technology bets - only to see investors flee after the dot-com crash.

Being a relatively small fund shop can also sometimes be an inherent disadvantage. Fidelity Contrafund, for instance, has almost $57 billion in assets just by itself, dwarfing entire firms like Hotchkis & Wiley, GuideStone and Delaware.

"There are certain benefits smaller firms are missing out on, like scale and trading costs," says Lipper's Roseen. "Bigger funds tend to have lower expenses because of their sheer size. But that said, the big boys can't really make a move without the whole market knowing about it. Smaller firms can be stealthier - and as a result, be a real delight for investors."

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