April 2011 IssueLong scroll reading

Queens Road Value (QRVLX)

By Editor

Objective

The fund seeks capital appreciation by investing in the stocks or preferred shares of U.S. companies. They look for companies with strong balance sheets and experienced management, and stocks selling at discounted price/earnings and price-to-cash flow ratios. It used to be called Queens Road Large Cap Value, but changed its name to widen the range of allowable investments. Nonetheless, it continues to put the vast majority of its portfolio into large cap value stocks.

Adviser

Bragg Financial Advisors, headquartered in Charlotte, NC. In particular, their offices are on Queens Road. Bragg has been around since the early 1970s, provides investment services to institutions and individuals, and has about $400 million in assets under management. It’s now run by the second generation of the Bragg family.

Manager

Steven Scruggs, CFA. Mr. Scruggs has worked for BFA since 2000 and manages this fund and Queens Road Small Cap Value (QRSVX). That’s about it. No separate accounts, hedge funds or other distractions. On the other hand, he has no research analysts to support him.

Management’s Stake in the Fund

As of the most recent Statement of Additional Information, Mr. Scruggs has invested between $10,000 and $50,000 in his fund. Though small in absolute terms, it’s described as “the vast majority of [his] investable assets.”

Opening date

June 13, 2002.

Minimum investment

$2500 for regular accounts, $1000 for tax-sheltered accounts.

Expense ratio

0.95% on assets of $19 million.

Comments

Steven Scruggs, and his investing partner Benton Bragg, are trying to do a simple, sensible thing well. By their own description, they’re trying to tune out the incessant noise – the market’s down, gold is up, it’s the “new normal,” no, it isn’t, Glenn Beck has investing advice, the Hindenburg’s been spotted, volumes are thin – and focus on what works: “over long periods of time companies are worth the amount of economic profits they earn for their shareholders.” They’re not trying to out-guess the market or make top-down calls. They’re mostly trying to find companies that will make more money over the next five years than they’re making now. When the stocks of those companies are unreasonably cheap, they buy them and hold them for something like 5-7 years. When they don’t find stocks that are unreasonably cheap given their companies’ prospects, they let cash (or gold, a sort of cash substitute) accumulate. As of the last portfolio disclosure, gold is about 3% and cash about 11% of the portfolio. The fund typically holds 50 or so names, which is neither terribly focused nor terribly dilute. He’s been avoiding big banks in favor of insurers. He’s overweighted technology, because many of those companies have remarkably solid financials right now. The manager anticipates slow growth and, it seems, mostly imprudent government intervention. As a result, he’s being cautious in his attempts to find high quality companies with earnings growth potential. All of this has produced a steady ride for the fund’s investors. The fund outperformed its peer group in every quarter of the 2007-09 meltdown and performed particularly well during the market drops in June and August 2010. And it tends to post competitive returns in rising markets. Its ability to handle poor weather places the fund near the top of its large-value cohort for the past one, three and five-year periods, as well as the eight-year period since inception.

Bottom Line

A fund for the times, or for the timid? It might be either. It’s clear that most retail investors have long patience (or courage) and are not willing to embrace high volatility investments. Mr. Scruggs ongoing skepticism about the market and economy, his attention to financially solid firms, and willingness to hold cash likely will serve such investors well.

Fund website

Queens Road Value Fund

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].