April 2011 IssueLong scroll reading

Vulcan Value Partners Small Cap Fund (VVPSX)

By Editor

Objective

Seeks to achieve long-term capital appreciation by investing primarily in publicly traded small-capitalization U.S. companies – the Russell 2000 universe – believed to be both undervalued and possessing a sustainable competitive advantage. They look for businesses that are run by ethical, capable, stockholder-oriented management teams that also are good at allocating their capital. The manager determines the firm’s value, compares it to the current share price, and then invests greater amounts in the more deeply-discounted stocks.

Adviser

Vulcan Value Partner. C.T. Fitzpatrick founded Vulcan Value Partners in 2007 to manage his personal wealth. Vulcan manages two mutual funds and oversees four strategies (Large Cap, Small Cap, Focus and Focus Plus) for its separate accounts. Since inception, all four strategies have peer rankings in the top 5% of value managers in their respective categories.

Manager

C.T. Fitzpatrick, Founder, Chief Executive Officer, Chief Investment Officer, and Chief Shareholder. Before founding Vulcan, Mr. Fitzpatrick worked as a principal and portfolio manager at Southeastern Asset Management, adviser to the Longleaf funds. He co-managed the relatively short-lived Longleaf Partners Realty fund. During his 17 year tenure (1990-2007), the team at Southeastern Asset Management achieved double digit returns and was ranked in top 5% of money managers over five, ten, and twenty year periods according to Callan and Associates.

Management’s Stake in the Fund

Mr. Fitzpatrick has over $1 million in each of Vulcan’s two funds. He also owns a majority of the Adviser. All of Vulcan Value’s employees make all of their investments either through the firm’s funds or its separate accounts.

Opening date

12/30/2009

Minimum investment

$5000, reduced to $500 for college savings accounts.

Expense ratio

1.5% after waivers on assets of $18.5 million, plus a 2% redemption fee on shares held fewer than 60 days.

Comments

Mr. Fitzpatrick is a disciplined, and bullish, value investor. He spent 17 years at Southeastern Asset Management, which has a great tradition of skilled, shareholder-friendly management. He left, he says, because life simply got too hectic as SAM grew to managing $40 billion and he found himself traveling weekly to Europe. (The TSA pat downs alone would cause me to reconsider the job.) While he was not one of the Longleaf Small Cap co-managers, he knows the discipline and has imported chunks of it. Like Longleaf, Vulcan runs a very compact portfolio of 20-30 stocks while many of the small-to-midcap peers holds 50-150 names. Both firms profess a long-term perspective, and believe that a five-year perspective gives them a competitive advantage when dealing with competitors who have trouble imagining “committing” to a stock for five months. Mr. Fitzpatrick’s description is that “We buy 900-pound gorillas priced like 98-pound weaklings. We have a five-year time horizon. Usually, our investments are out of favor for short-term reasons but their long-term fundamentals are sound.” They continue to hold stocks which have grown beyond the small cap realm, so long as those stocks continue to have a favorable value profile. As a result, both firms hold more midcap than small cap stocks in their small cap funds. Neither firm is a “deep value” purist, so the portfolios contain a number of “growth” stocks. And both firms require that everyone’s interests are aligned with their shareholders; the only investment that employees of either firm are allowed to make are in the firms’ own products. That discipline seems to work. It works for Longleaf, which has 20 years of top decile returns. It’s worked for Vulcan’s separate accounts, whose small cap composite outperformed their benchmark by index by 900 basis points a year; gaining 4% which the Russell Value index dropped 5%. And it’s worked so far for the Vulcan fund, which gained nearly 23% over the first 11 months of 2010. That easily outpaces both its small- and mid-cap peer groups, placing it in the top 10% of the former.

Bottom Line

Mr. Fitzpatrick is bullish on stocks, largely because so few other people are. Money is flowing out of equities, at the same time that corporate balance sheets are becoming exceptionally strong and bonds exceptionally unattractive. In particular, he finds the highest quality companies to be the most undervalued. That creates fertile ground for a disciplined value investor. For folks venturesome enough to pursue high quality small companies, Vulcan offers the prospects of a solid, sensible, profitable vehicle.

Fund website

Vulcan Value Partners Small Cap. You might browse through the exceptionally detailed discussion of their small cap separate accounts, of which the mutual fund is a clone. There’s a fair amount of interesting commentary attached to them.

Fact Sheet

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