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NEW YORK (Reuters) - Pacific Advisors Small Cap Value Fund portfolio manager George Henning says financial metrics are only a small part of investing. Evaluating people may matter more.
A focus on the management of the companies he invests in, along with double-digit gains in holdings like trucking company Saia Inc and industrial supply company DXP Enterprises Inc, helped the $115 million fund gain 23.6 percent over the first quarter. That is the best performance of any U.S. stock fund during that period, according to Lipper data.
And the first quarter does not look like a fluke. Pacific Advisors Small Cap Value returned an annualized 19.2 percent a year over the last 10 years, putting it among the top 1 percent of the 327 funds in its Lipper category of small-cap funds.
"The Street tends to discount management teams," said Henning, who began running the fund in 1993 after a decade of working for insurance company Chubb Corp.
"If you have a proven team, they might not make all the right moves all of the time," he said, "but you don't want to get out of the stock because it hits your price target."
In late 2008, for instance, shares of Conn's Inc tumbled 78 percent to $4.50 after damage from hurricanes Gustav and Ike hurt sales and the Beaumont, Texas-based retailer borrowed $33.4 million to purchase inventory for the holiday season. That is when Henning and his team began building a significant stake.
"People weren't paying attention" to management's plans to expand from a focus on electronics to the higher-margin business of selling bedding and other home furniture to its blue-collar customer base, Henning said.
Originally, Henning had a price target of $7 for the shares, but held on after they surpassed it. The stock has risen nearly 44 percent to about $44 since the start of 2013 after the company announced record fourth-quarter earnings.
Even with the fund's well-above-average track record, investors may want to be cautious before jumping in.
Pacific Advisors Small Cap Value's bets on so-called microcap stocks - the smallest and most volatile of all publicly traded companies - boost both returns and risks. About 55 percent of the fund's assets are in microcap companies, compared with an average of 10 percent among funds in its category, according to fund tracker Morningstar.
Microcaps tend to have market capitalizations of up to $300 million, while small caps are generally between $300 million and $2 billion.
The fund's expenses are above average, too. Pacific Advisors Small Cap Value charges $2.71 per $100 invested, compared with an average of $1.30 for its category. Investors in its Class A shares pay a load of 5.75 percent.
"That's about as high as it gets," said Morningstar senior fund analyst Laura Lallos.
The fund "has a nice track record as successful small-cap stock pickers," she added, but beating its annual costs is a "hurdle that it will always have."
Henning does not label Pacific Advisors Small Cap as a microcap fund, but says it focuses on such stocks because they tend to be overlooked. Any new positions in the fund tend to be in companies with market caps below $600 million.
Because small and microcap companies often are concentrated in one area, the fund tends to zone in on geographic regions that look attractive.
Hornbeck Offshore Services, for instance, is a market leader in supplying offshore rigs in the growing Gulf of Mexico region. As companies once again expand in the Gulf following the moratorium on drilling in the wake of the 2010 Deepwater Horizon spill, the number of deepwater rigs in the region will reach a record high by the end of 2013, according to a report by S&P Capital.
Covington, Louisiana-based Hornbeck's shares are up 24 percent for the year, in part because of speculation that it could be a takeover target. The company has a $1.5 billion market cap and a price-to-earnings ratio of 41.7.
Henning also likes energy service companies like barge operator Kirby Corp, whose market cap is $4.2 billion, and Parker Drilling Co, $481 million. Both serve the Gulf region.
"If you believe that the economy is going to grow, like we do, then energy will be a big part of it," Henning said.
Among consumer companies, Henning is a fan of Bravo Brio Restaurant Group Inc, which he discovered on a business trip to Pittsburgh.
"My first reaction was, 'This could work in California,'" because of its emphasis on upscale, casual restaurants that do well in shopping centers, said Henning, who is based in Los Angeles.
The company is expanding its number of locations by about 10 percent a year without taking on additional debt, which makes it an attractive long-term holding, Henning said.
Bravo Brio's shares are up 19.6 percent since the start of the year and trade at a price-to-earnings ratio of 20.4.
Henning is not concerned that the 10 percent jump in the small-cap benchmark Russell 2000 index since the start of the year will make it harder to find new investment opportunities.
"Focusing on cheapness only takes you so far," he said. "But by focusing on quality management, you find companies that will be good businesses over time."
(The story corrects name of fund to Pacific Advisors from Pacific Capital.)
Reporting by David Randall; Editing by Lauren Young and Lisa Von Ahn