| NEW YORK, March 21
NEW YORK, March 21 Some of the best fund
managers you've never heard of sit in a non-descript office park
in Shawnee Mission, Kansas, 1,200 miles from Wall Street.
There, John Bichelmeyer heads the five-member team behind
the Buffalo Emerging Opportunities Fund. Few outfits
have performed better since the bull market began in March of
2009. An investor who put his money into the small-cap fund
that month would have gained an average 42.1 percent per year
for the next five years, a performance nearly 15 percentage
points ahead of the benchmark Russell 2000 index of small
That track record led to a 2014 U.S. Lipper Award for small
Bichelmeyer has done it largely by focusing on the smallest
of publicly traded companies, known as micro-caps. The fund
changed its name from the Buffalo Micro Cap fund in June last
year, and the average market-cap among the 61 stocks in its
portfolio is just $874 million, according to Lipper data.
Bichelmeyer looks for "premier, early-stage growth
companies" in the technology, healthcare, financial and consumer
sectors that stand to benefit from one or more of roughly 25
long-term trends, ranging from the growth of cloud-based
computing to higher spending on pet care. His team expects all
of these trends to last for the next several years.
Trend-spotting is only the first step - a way to narrow down
possibly promising companies with under $1 billion in market
value. After that, the team focuses on names that have
above-average revenue growth, higher returns on capital, the
potential for high margins, and that can either fund themselves
with their free cash flow or are close to it. The goal is to
find a company that can grow by at least double the rate of the
economy and do it with a clean balance sheet.
Bichelmeyer's outsized gains have brought a flood of new
assets into the $581 million fund, which announced a soft close
in November after passing $475 million in assets. It is still
open to existing investors and those who have access through a
401(k) plan or whose advisors already invest in the fund.
Investors in Buffalo Emerging Opportunities pay an annual
fee of $1.50 per $100 invested, which Lipper considers high. The
fund does not pay a dividend.
The fund's biggest bets are on technology, with roughly 40
percent of the portfolio spread out among companies that include
high-tech manufacturing software maker PDF Solutions Inc
, tax-advantaged spending account facilitator WageWorks
Inc, and medical information provider Omnicell Inc
Bichelmeyer typically holds a company for 3 to 5 years until
it either morphs into a mid-cap stock or its business growth
slows significantly. Holding a stock that looks expensive
doesn't faze him.
"We try to find good businesses first and then focus on
valuation second," he said. "If you have the right business and
continue to execute, then objects in motion tend to stay in
When Bichelmeyer buys a company, however, he's willing to
wait for a price he likes. The fund recently added veterinary
products company Abaxis Inc when the stock fell more
than 10 percent after losing a major distributor. Abaxis
recently signed a new national contract, which will make its
revenues "lumpy" for a few quarters, Bichelmeyer said.
"We're taking this air pocket in the results as an
opportunity to enter," he added.
Bichelmeyer ended the year with roughly 12 percent of his
portfolio in cash, and has been using down days in the market to
add to his positions with companies such as specialty retailer
Black Diamond Inc, which is expanding into apparel from
its core market of boots, helmets and other gear for hikers and
skiers. The strength of its brand for hard goods should help it
take on competitors such as Patagonia and North Face (owned by
conglomerate VF Corp ), Biechelmeyer said.
"Retailers are always looking for something new and
innovative to set their stores apart from the pack, and this
brand does that at a time when you can find the North Face
everywhere," he said.
Black Diamond shares are up 35 percent during the last 52
weeks, but have fallen about 10 percent since the start of
January. The $392 million market cap company booked revenues of
$238 million last year and turned in a tiny profit for its 2013
Investors who follow Bichelmeyer's lead should be prepared
for the risks of buying into such small companies, said Todd
Rosenbluth, director of mutual fund research at S&P Capital IQ.
"The portfolio manager has done a remarkable job of stock
selection, and that's paying off for investors," Rosenbluth
said. "But these companies are the ones who have benefited the
most overall over the last five years, so it's hard to say that
performance can continue."
(Reporting by David Randall. Editing by Lauren Young and Andre