Sub-advisors to the Masters' Select Smaller Companies Fund
The opinions and conclusions expressed herein are those of Litman/Gregory Fund Advisors, LLC (LGFA) and Michael Malouf and Tucker Walsh at the time the material is written and may not be reflective of current conditions.
Michael Malouf and Tucker Walsh are the co-portfolio managers for the segment of the Fund's assets run by Copper Rock Capital Partners ("Copper Rock"). Both Malouf and Walsh are partners in Copper Rock and have co-managed the Old Mutual Copper Rock Emerging Growth Fund since its inception in July of 2005. Malouf co-founded Copper Rock in 2005 and is President of the firm. He previously was Managing Director and head of small-cap growth investing at Neuberger Berman and managed the Neuberger Berman Millennium Fund from 1998 to 2002. Prior to that, he held the position of Small Cap Portfolio Manager at RCM Capital Management. Walsh has been Chief Executive Officer since co-founding Copper Rock in 2005. Prior to then, he was a Managing Director at State Street Research where he was head of the small-cap growth team. He also managed the State Street Research Emerging Growth Fund. Copper Rock has been an investment manager to Masters' Select Smaller Companies Fund since July 2006.
Mike Malouf: I've always been passionate about learning and have a high level of intellectual curiosity. Investment management interested me because it provides constant learning opportunities and interaction with companies at all stages of their business cycle.
Tucker Walsh: Like my co-portfolio manager, I am passionate about learning and have always been fascinated by how companies grow into great companies. I started my career as an analyst on Wall Street, like many of my peers, and decided I wanted to focus on small companies and their potential to break through into larger, multi-product companies.
Tucker & Mike: More recently, we have taken our interest in learning and channeled it in a new direction, becoming founders of our own firm. Before we were partners, we were competing managers who often met for lunch to discuss portfolios, ideas and stocks. These meetings became the roots for working together and starting Copper Rock.
Our investment philosophy developed over time and through our experience working within larger institutions. As we gained more expertise managing small cap money and focusing on fundamental analysis of small and mid-sized growth companies, we saw inefficiencies in the marketplace. We believe a fundamental growth approach with a strict sell discipline provides the best opportunity to outperform in all market conditions. We seek to identify the emerging leaders across all industries, investing in potential future market leaders at an early point in their growth cycle and before widespread investor interest drives valuations upward. In some instances, the beginning research and fundamentals do not always meet our investment criteria and the names are rejected. For example, in 2006 we looked at Jcom, j2 Global Communications, Inc., a company that offers fax, voicemail, e-mail and call handling services. Our initial research showed that this company demonstrated many of the characteristics that we look for in a company. It showed strong potential for growth, with an opportunity for expanding margins in the short term (6 months to a year). Upon further examination, the team concluded that the business model was so appealing that it was susceptible to outside competition. Larger companies would most likely enter this area which would be detrimental to margins and multiples in a few years, thus, the candidate was rejected. In other instances, though, we will think about "exploding themes" within the portfolio. For example, during 2005 we started researching SalesForce.com, a leader in the customer relationship management online system space. As we began researching this name, which we held in the portfolio, our research led us to other names and ideas within the business services area, such as Kenexa, a leading provider of software and services for the outsourcing industry, and PeopleSupport, a company providing offshore business process outsourcing, or BPO, services from outsourcing centers overseas.
Our approach is based on two factors: bottom-up stock selection and a "no excuses" sell discipline. First, through organic idea generation, proprietary screens, and bottom-up themes, we narrow the universe of stocks to approximately 300 names. Within that subset, we conduct detailed fundamental analysis, focusing on companies with strong and sustainable growth, room for margin expansion, and proven management. From this analysis, we identify between 70 and 90 names for the small cap product and between 40 and 60 names for the small to mid-sized product.
For every company, we ask three broad questions. Is this a growth company? Is the growth sustainable? Is the growth priced into the market? We look for companies with strong revenues (+15%) and solid earnings growth (+20%) in industries that are also growing. We analyze market share growth, competitive threats, and strategies for further growth. Finally, we look at specific characteristics such as price targets, industry and peer valuation, and macro economic inputs. We do not include a top down approach when considering an investment, so the macroeconomic factors become fallouts of the research process.
- Access to company's management
- No excuses sell strategy
- Managing money within capacity
It is critical to our success to thoroughly understand the management team and individual roles and responsibilities. Having in-depth conversations with a firm's management is mandatory before a stock is included in the portfolio. It is through these discussions that the team is able to understand a firm's true plan to generate cash flows and to increase margins. Our Boston location gives us an advantage to follow many companies as on any given day, between four and eight companies come through town to meet the array of investment managers in the area. The team also attends industry conferences and has on-site visits throughout the year.
We have a disciplined sales process and we do not fall in love with a stock. If a company's fundamentals are deteriorating, business objectives have been missed, a change in the industry outlook has occurred or management has changed, we re-evaluate our holding. We also strictly adhere to the CFO rule. The CFO rule dictates that we will sell a stock if the CFO leaves the company under any circumstance. In this situation, the company poses a communication risk with uncertain future expectations. Also, when a CFO departs, it could be a signal he is aware of the company's weak outlook.
Finally, we recognize that capacity is important when managing this asset class. Liquidity constraints are taken seriously and the ability to sell stocks within an effective time frame is paramount to our success. We currently look to have no more than 10 days trading volume, which also allows us to exit a stock quickly if company fundamentals have changed.
Our organizational structure has allowed us to insulate the investment professionals from alpha-blocking tasks (non-investment responsibilities) and to focus on managing money and doing investment research. We benefit from a strong relationship management and operations team as well as support from Old Mutual that keeps us focused on spending 70% of the time covering the names already in the portfolio and 30% of the time researching possible additions or new ideas. Our team is organized to provide appropriate coverage for stocks in the small and SMID universes and a high comfort level with our analysis. Research is done by all members of the team. As portfolio managers, we are responsible for original research along with portfolio construction. Tucker focuses on technology, consumer goods and services and some special situations. Mike covers technology, consumer goods and services, energy and industrials. Our two analysts, both partners in the firm, have more dedicated sector responsibilities. Greg Poulos focuses on healthcare companies. He has extensive experience covering this sector, and the team benefits tremendously from his thorough understanding of the regulatory and medical information associated with these names. Dave Cavanaugh primarily covers financial companies, but he is also a generalist for our SMID product. Our head trader, Mike Callahan, plays an extremely important role in our day to day operations. He has over 20 years of experience trading small companies and has built an extensive network. We are able to leverage this as we look for the best price, best execution.
Our team is very cohesive. Everyone sits very close to each other and the trading desk is outside the portfolio managers' offices. Often if one analyst is discussing a stock, it is very easy for someone else to join in the dialogue. In many instances, another member of the team also follows a company or participates in an on-site meeting. This facilitates information- sharing, discussion and debate regarding company strategies and better tracking of companies against their peers or like-company model.
Finally, we have a daily morning meeting where we discuss names in the portfolio, economic and market news and new ideas each of us is working on. Mike Callahan, our trader, runs our morning meeting starting the day with economic and market news. We then spend time on particular companies that are experiencing specific or unusual trading activity, have made announcements, or are reaching considerations for selling, i.e., achieving price targets. All of these inputs and decisions are compiled and thoughtfully discussed for the Masters' Select portfolio. If we make a decision to sell a security, it involves multiple members of the team and the risk vs. reward of selling entirely or scaling back over time is thoughtfully discussed.
We take a fundamentals first approach when managing our portfolios. Our primary source of information is the company itself. We also use Thomson One, WONDA, and Bloomberg, and other analyst reports.
We view the concentrated portfolio as a great representation of the best ideas in our small cap growth portfolio; all a result of our bottom-up, fundamentals first stock selection. As a result of this analysis, all of the selected stocks, typically among the larger holdings in the representative account, represent our best research from each sector.
Neither the information contained herein or the opinions expressed shall be construed as an offer to sell or a solicitation to buy any securities mentioned herein. Click here to view the most recent portfolio holdings of the fund.
The fund may invest in foreign securities, which exposes investors to economic, political and market risks and fluctuations in foreign currencies. The fund will invest in the securities of small companies, which subjects investors to additional risks, including security price volatility and less liquidity than investing in larger companies.
To obtain a current prospectus for the Masters’ Select Funds at no charge, please click here or call 1-800-960-0188. The prospectus contains more complete information with respect to the risks, costs and expenses of investing in the Funds. Please read it carefully before investing.
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