December 2016 IssueLong scroll reading

Tributary Small Company (FOSCX)

By David Snowball

Objective and strategy

The fund pursues long-term capital appreciation. They invest in a portfolio of 60-70 small-cap stocks, mostly domiciled in the U.S. Their fundamental approach is value-oriented and broadly diversified across economic sectors. In general, each position in the portfolio starts out about equally weighted; 50 of the 65 current holdings are each between 1-2% of the portfolio. They hold minimal cash, currently about 4%. Portfolio turnover is in the range of 25-35%, far below the small cap average.  

Adviser

Tributary Capital Management, LLC, formed in May 2010, is an Omaha-based SEC Registered Investment Adviser providing asset management services to individuals, institutions and investment companies. They have an interesting and instructive corporate history. They began as the First Omaha Funds in 1992 and were a service of the trust department of the First National Bank of Omaha. In 1999 they began national distribution of the funds and, in 2001, rebranded as First Focus; all of which was admirable and none of which was sufficient to make them economically viable. Money was flowing out.

In 2010, they got serious about reformation. They had four strategies:

  • Rebrand the complex as Tributary
  • Close any fund that didn’t have a sustainable value proposition
  • Improve the national distribution channels
  • Improve the remaining offerings and work on a national level to secure distribution agreements

They closed three funds, rebranded themselves as “a boutique equity firm offering small, large and all capitalization strategies with a particular focus on small capitalization” and offered good products at reasonable prices. All of the Tributary funds are solid, some are exceptional. The firm has $1.2 billion in assets under management, up more than $300 million since the reformation, and advises six mutual funds.

Manager

Mark Wynegar and Michael Johnson. Mr. Wynegar leads the Value Equity Team, manages the Small Company Value Strategy and is responsible for $475 million in assets outside of the fund. He joined Tributary’s predecessor in 1999 and has been managing this fund since then. Mr. Johnson is one of the small cap value managers with special responsibility for the technology and telecommunication sectors. Mike has 22 years of industry experience and joined Tributary Capital Management’s predecessor, First Investment Group in March 2005 and began managing this fund in 2007. Before that he worked for 11 years at Principal Global Investors in Des Moines.

Management’s stake in the fund

Mr. Wynegar has invested between $50,000-100,000 of his own money in the fund; Mr. Johnson has between $100,000-500,000. One of the fund’s three independent directors has invested in the fund; indeed, only one of the three has any investment in any of the Tributary funds.

Opening date

June 10, 1996.

Minimum investment

$1,000.

Expense ratio

1.18% on assets of $425 million.

Comments

The most distinctive element of the Observer’s fund analysis is the Great Owl designation, which is awarded only to those funds which has delivered top quintile risk-adjusted returns, based on Martin Ratio, in its category for evaluation periods of 3, 5, 10, and 20 years. The Martin Ratio is a more risk-sensitive form of the well-known Sharpe Ratio, both of which ask “are you getting well-paid for the risks you’re subject to?” In the case of Tributary, it has risk-adjusted returns in the top 20% of small-core funds for the past three, five, ten and twenty year periods. It is one of only three funds that have a performance record that long and that strong; Neuberger Berman Genesis (NBGNX) and Hartford Schroders US Small Cap Opportunities Fund (SCUIX) are the other two.

Overall, there are only nine small cap Great Owl funds that have been around since the start of the current market cycle and which are open to new investors. Almost all, except Tributary, are household names, at least in the investment community. They are:

Brown Advisory Small-Cap Growth (BIASX)

Champlain Small Company (CIPSX)

Fidelity Advisor Small Cap Value (FCVIX)

Hartford Schroders US Small Cap Opportunities (SCUIX)

Neuberger Berman Genesis (NBGNX)

Queens Road Small Cap Value (QRSVX)

T Rowe Price QM US Small-Cap Growth Equity (PRDSX)

Tributary Small Company (FOSCX)

Vanguard Tax-Managed Small-Cap (VTMSX)

Using the MFO Premium screener, we assessed the performance of the best-of-class funds over the course of a full market cycle; that is, we looked at their returns, their risks and standard measures of the risk-return trade-off over the period from October 2007 to the present.

  Returns MAXDD Recvry mo Standard dev Downside dev Ulcer Index Bear market dev Sharpe Ratio Sortino Ratio Martin Ratio
Tributary Small Company Fund 9.1 -44.5 30 15.8 10.6 9.7 9.6 0.44 0.65 0.71
Small-Cap Core Average 8.9 -52.5 51 18.6 12.8 14.8 11.6 0.37 0.54 0.50
Rank among the nine Great Owls 2nd 3rd 2nd 5th 5th 2nd 5th 3rd 2nd 1st

How do you read that? Compared to the average small cap core fund, Tributary Small Company has provided higher returns, substantially smaller risks, substantially shorter down periods and substantially better risk-adjusted returns.

Even compared to the Great Owl cohort, the top nine out of 300 small cap funds, Tributary rests in the top tier. It is at or above the group mean in every category and finishes in the top three on seven of 10 measures. And it’s also one of the group’s three smallest and most nimble funds.

Based on data as of 6/30/2016, Morningstar, aiming for the same goal of rewarding funds for their risk-adjusted performance, gave FOSCX a five-star 3-year rating, four-star 5-year rating, five-star 10-year rating and a five-star rating overall.

What might explain the fund’s consistent strength?

The managers are intent and value-conscious. This is, and has been, their only charge. They attempt to identify resilient small companies whose stock is mispriced. Among the factors they look at are “price-to-earnings ratio, balance sheet strength, cash flow, capital usage efficiency, management style and adaptability, market share, product lines and pricing flexibility, distribution systems, and use of technology to improve productivity and quality.” It’s a good “we own the business, not just the pieces of stock” mindset.

They take diversification seriously. They’ve spread their investments across all sectors and rarely overweight any sector by more than a couple points; currently, the only substantial overweight is in industrials. Likewise, they’ve spread their investments evenly across their portfolio; their largest position consumes2.4 % of assets and their smallest position sits at 0.8 % with the vast majority roughly evenly weighted at between 1-2% of the portfolio. They hold some fairly growth-y names, but about as many value stocks.

They are patient with their stocks. The fund’s turnover is about half the average.

They are patient with themselves. The management team is stable, with the guys working on the fund for 11 and 17 years.

Bottom Line

Some funds are intriguing because of their innovative approaches, distinctive portfolios or high-profile managers. Others simply get the job done, quietly and well, year after year. You might think of them as the “blocking and tackling” funds. If you’re looking for a fund comparable to the now closed Mairs & Power Small Cap (MSCFX) this might be it. Both are four- or five-star Great Owl funds, both are low-profile, low turnover, low stress, broadly diversified, and quintessentially Midwestern.

Tributary Small Company is one of the best small cap funds available to you. It likely deserves your attention.

Fund website

Tributary Small Company Fund. Don’t get your hopes up, these folks really aren’t much into communication.

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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.