Aegis Value (AVALX) – May 2009

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

May 1, 2009

FundAlarm Annex – Fund Report

Fund name:

Aegis Value (AVALX)


The fund seeks long-term capital appreciation by investing (mostly) in domestic companies whose market caps are ridiculously small. On whole, these are stocks smaller than those held in either of Bridgeway’s two “ultra-small” portfolios.


Aegis Financial Corporation of Arlington, VA. AFC, which has operated as a registered investment advisor since 1994, manages private account portfolios, and has served as the Fund’s investment advisor since the fund’s inception. They also advise Aegis High Yield.


Scott L. Barbee, CFA, is portfolio manager of the fund and a Managing Director of AFC. He was a founding director and officer of the fund and has been its manager since inception. He’s also a portfolio manager for approximately 110 equity account portfolios of other AFC clients managed in an investment strategy similar to the Fund with a total value of approximately $80 million. Mr. Barbee received an MBA degree from the Wharton School at the University of Pennsylvania.

Management’s Stake in the Fund:

As of August 31, 2008, Mr. Barbee owned more than $1 million of fund shares. He will also be the sole owner of the adviser upon retirement of the firm’s co-founder this year.

Opening date

May 15, 1998

Minimum investment

$10,000 for regular accounts and $5,000 for retirement accounts, though at this point they might be willing to negotiate.

Expense ratio

1.43% on assets of $66 million


Let’s get the ugly facts of the matter out of the way first. Aegis Value is consistently a one- to two-star small value fund in Morningstar’s rating system. It has low returns and high risk. The fund’s assets are one-tenth of what they were five years ago.

‘Nuff said, right?

Maybe. Maybe not. I’ll make four arguments for why Aegis deserves a second, third, or perhaps fourth look.

First, if we’d been having this discussion one year ago (end of April 2008 rather than end of April 2009), the picture would have been dramatically different. For the decade from its founding through last May, Aegis turned a $10,000 initial investment into $36,000. Its supposed “small value” peer group would have lagged almost $10,000 behind, while the S&P500 would have been barely visible in the dust. Over that period, Aegis would have pretty much matched the performance of Bridgeway’s fine ultra-small index fund (BRSIX) with rather less volatility.

Second, ultra-small companies are different: benchmarking them against either small- or micro-cap companies leads to spurious conclusions. By way of simple example, Aegis completely ignored the bear market for value stocks in the late 1990s and the bear market for everybody else at the beginning of this century. While it’s reasonable to have a benchmark against which to measure a fund’s performance, a small cap index might not be much more useful than a total market index for this particular fund.

Third, ultra-small companies are explosive: Between March 9 and April 29, 2009, AVALX returned 66.57%. That sort of return is entirely predictable for tiny, deep-value companies following a recession. After merely “normal” recessions, Morningstar found that small caps posted three-year returns that nearly doubled the market’s return. But the case for tiny stocks after deep declines is startling. Mr. Barbee explained in his January 22 shareholder letter:

. . . in the 5 years following 1931, the Fama/French Small Value Benchmark returned a cumulative 538 percent without a down year, or over 44 percent per year. Even including the damaging “double-dip” recession of 1937, the benchmark returned over 21 percent annually for the 7 years through 1938. After market declines in 1973 and 1974, over the next 7 years (1975 through 1981), the Fama/French Small Value Benchmark returned a cumulative 653 percent without a down year, or greater than 33 percent per year.

Fourth, the case for investing in ultra-small companies is especially attractive right now. They are deeply discounted. Despite the huge run-up after March 9, “the companies held by the … Fund now trade at a weighted average price-to-book of 29.4%, among the very lowest in the Fund’s nearly 11-year history.” The universe of stocks which the manager finds most attractive – tiny companies selling for less than their book value – has soared to 683 firms or about five times the number available two years ago. After the huge losses of 2008 and early 2009, the fund now packs a tax-loss carryforward which will make any future gains essentially tax-free.

Bottom Line

Mr. Barbee, his family and his employees continue to buy shares of Aegis Value. He’s remained committed to “buying deeply-discounted small-cap value stocks,” many of which have substantial cash hoards. Investors wondering “how will I ever make up for last year’s losses?” might find the answer in following his lead.

Fund website

Aegis Value fund

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