The fund’s investment objective is capital appreciation, which they hope to obtain by investing primarily in undervalued small cap stocks. Small caps are defined as those comparable to those in the Russell 2000, whose largest stocks are about $3.3 billion. They can also invest up to 10% in foreign stocks, generally through ADRs. There’s a comparable strategy – the “GRT Value Strategy – Long only U.S. Equity Strategy” – used when they’re investing in private accounts. They describe the objective there in somewhat more interesting terms. In those accounts, they want to achieve “superior total returns while” – this is the part I like – “minimizing the probability of permanent impairment of capital.”
GRT Capital Partners. GRT was founded in 2001 by Gregory Fraser, Rudolph Kluiber and Timothy Krochuk. GRT offers investment management services to institutional clients and investors in its limited partnerships. As of 09/30/2011, they had about $315 million in assets under management. They also advise the GRT Absolute Return (GRTHX) fund.
The aforementioned Gregory Fraser, Rudolph Kluiber and Timothy Krochuk. Mr. Kluiber is the lead manager. From 1995 to 2001, he ran State Street Research Aurora (SSRAX), a small cap value fund which is now called BlackRock Aurora. Before that, he was a high yield analyst and assistant manager on State Street Research High Yield. Mr. Fraser managed Fidelity Diversified International from 1991 to 2001. Mr. Krochuk managed Fidelity TechnoQuant Growth Fund from 1996 to 2001 and Fidelity Small Cap Selector fund in 2000 and 2001. The latter two “work closely with Mr. Kluiber and play an integral part in generating investment ideas and making recommendations for the Fund.” Since 2001, they’ve worked together on limited partnerships and separate accounts forGRT Capital. All three managers earned degrees from Harvard, where Mr. Kluiber and Mr. Fraser were roommates.
Management’s Stake in the Fund
As of 07/31/2011, Messrs Kluiber and Fraser each had $500,000 – $1,000,000 in the fund while Mr. Krochuk had more than $1 million.
May 1, 2008.
$2,500 for regular accounts, $500 for retirement accounts and $250 for spousal IRAs.
1.30%, after waivers, on assets of $120 million, unchanged since the fund’s launch. There’s also a 2% redemption fee for shares held fewer than 14 days.
Investors looking to strengthen the small cap exposure in their portfolios owe it to themselves to look at GRT Value. It’s that simple.
On the theme of “keeping it simple,” I’ll add just two topics: what do they do? And why should you consider them?
What do they do?
GRT Value follows a long-established discipline. It invests, primarily, in undervalued small company stocks. Because of a quirk in data reporting, the portfolio might seem to have more growth stock exposure than it does. The manager highlights three sorts of investments:
Turnaround Companies – those “that have declined in value for business or market reasons, but which may be able to make a turnaround because of, for instance, a renewed focus on operations and the sale of assets to help reduce debt.” Because indexes might be reconstituted only once or twice a year, some of the fund’s holdings remain characterized as “growth stocks” despite a precipitous decline in valuation.
Deep Value Companies – those which are cheap relatively to “the value of their assets, the book value of their stock and the earning potential of their business.”
Post-Bankruptcy Companies – which are often underfollowed and shunned, hence candidates for mispricing.
The fortunes of these three types of securities don’t move in sync, which tends to dampen volatility.
As with some of the Artisan teams, GRT uses an agricultural analogy for portfolio construction. They have “a ‘farm team’ investment process [in which] positions often begin relatively small and increase in size as the Adviser’s confidence grows and the original investment thesis is confirmed.” The manager’s cautious approach to new positions and broad diversification (188 names, as of 10/31/11), work to mitigate risk.
The managers are pretty humble about all of this: “There is no magic formula,” they write. “It simply comes down to experienced managers, using well-established risk guidelines for portfolio construction” (Annual Report, 07/31/11).
Why should you consider them?
They’re winners. The system works. High returns, muted risk.
GRTValue seems to be an upgraded version of State Street Research Aurora, which Mr. Kluiber ran with phenomenal success for six years. Morningstar’s valedictory assessment when he left the fund was this:
Kluiber, the fund’s manager since its 1995 inception, built it into a category standout during his tenure. In fact, the fund gained an average of 28.9% per year from March 1995 throughApril 30, 2001, while its average small-cap value peer gained 15.5%.
The same analyst noted that the fund’s risk scores were low and that “[m]anagement’s willingness to go farther afield in small-value territory has been a boon over the long haul. For instance, management doesn’t shy away from investing in traditionally more growth-oriented sectors, such as technology, if valuations and fundamentals” are compelling. The article announcing his departure concluded, “Kluiber had built a topnotch record since Aurora’s 1995 inception. The fund’s trailing three- and five-year returns for the period endingApril 27, 2001, rank in the top 5% of the small-cap value category;Auroraalso boasted relatively low volatility and superior tax efficiency.”
Hmmm . . . high returns, low risk, high tax efficiency all maintained over time. Those seek like awfully promising attributes in your lead manager.
Since 2004, the trio have been managing separate accounts using the strategies embodied in both Aurora andGRTValue. They modestly trailed the Russell 2000 index in their first year of operation, then substantially clubbed it in the following three. That reflects a focus on getting it right, every day. “We’re just grinders,” Mr. Krochuk noted. “We come in every day and do our jobs together.” In baseball terms, they were hoping to make contact and hit lots of singles rather than counting on swinging for the fences in pursuit of rare, spectacular gains.
Since 2008, GRT Value has continued the tradition of clubbing the competition. At this point, the story gets muddied by Morningstar’s mistake. Morningstar categorizes GRTVX as a mid-cap blend fund. It’s not. Never has been. The portfolio is more than 80% small- and micro-cap. The fund’s average market cap – $790 million – is less than half of the average small blend fund’s. It’s below the Russell 2000 average. That miscategorization throws off all of Morningstar’s peer assessments for star rating, relative returns, and relative risk. Judged as a small-blend or small-value fund, they’re actually better than Morningstar’s five-star rating implies.
GRTVX has substantially outperformed its peers since inception: $10,000 invested at the fund’s opening has grown to $13,200, compared to $11,800 at its average peer
GRTVX has outperformed its benchmark in down markets: it has lost less, or actually registered gains, in 11 of the 14 months in which the index declined (from 01/09 – 02/12). That’s consistent both with Mr. Kluiber’s risk-consciousness and his long-term record.
GRTVX has a consistently better risk-return profile than the best small blend funds. Morningstar analysts have identified five best-of-the-best funds in the small blend category. Those are Artisan Small Cap Value (ARTVX, closed), Bogle Small Growth (BOGLX, the retail shares), Royce Special (RYSEX, closed), Vanguard Small Cap Index (NAESX, the retail shares) and Vanguard Tax-Managed Small-Cap Fund (VTMSX, the Admiral Shares). Using Fund Reveal’s fine-grained risk and return data, GRTVX offers a better risk-return profile – over the trailing one, two and three year periods – than any of them. The only fund (RYSEX) with somewhat-lower volatility has substantially lower returns. And the only fund with better average daily returns (BOGLX) has substantially higher volatility.
Nothing in life is certain, but the prospects forGRT Value’s future are about as close as you’ll get. The managers have precisely the right experience. They have outstanding, complementary track records. They have an organizational structure in which they have a sense of control and commitment. Its three year record, however measured, has been splendid.