| NEW YORK, March 9
NEW YORK, March 9 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
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
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
"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."