Objective and strategy
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.
The manager pursues a sort of “quality value” strategy: he seeks high-quality firms (strong balance sheets and strong management teams) whose stocks are undervalued (based, initially, on price/earnings and price-to-cash flow metrics). They sell very rarely which is reflected in a 1% turnover ratio. Factors that encourage a sale include excess stock valuation, the need to harvest tax losses to offset taxable gain, or for cash to meet redemptions. The fund’s cash level, which the manager describes as “elevated for an extended period,” quickly dropped to about 2% as the March 2020 crisis produced “very attractive opportunities.”
Bragg Financial Advisors, headquartered in Charlotte, NC. Bragg has been around since the early 1970s, provides investment services to institutions and individuals, and has about $1.7 billion in assets under management. They advise the two Queens Road funds and 1200 or so separately managed accounts. The firm is now run by the second generation of the Bragg family.
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. He is supported by Matt Devries, CFA.
Strategy capacity and closure
Essentially unconstrained, given their focus on large, highly-liquid firms. With $30 million in fund assets, closure remains a distant threat.
Management’s stake in the fund
As of the most recent Statement of Additional Information, Mr. Scruggs has invested between $50,000 and $100,000 in his fund. The officers of Bragg Financial, including Mr. Scruggs, collectively own 1.7% of the fund’s shares.
June 13, 2002.
$2,500 for regular accounts with a surprisingly high subsequent investment minimum of $1,000; the minimum is $1,000 for tax-advantaged accounts
0.95% on assets of $34 million.
Queens Road Value was the first fund profiled in the first issue of Mutual Fund Observer, April 2011. We wanted to highlight a fund that offered the prospect of long-term stability and success. We were drawn to Queens Road because it offered a sensible strategy that had been well-executed for years. We wrote:
[Mr. Scruggs is] 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.
We concluded, “Mr. Scruggs ongoing skepticism about the market and economy, his attention to financially solid firms, and willingness to hold cash likely will serve [conservative equity] investors well.” Morningstar recently affirmed our judgment by assigning Queens Road its forward-looking Morningstar Gold Q analyst rating.
Queens Road has more than met our expectations for competitive returns with top tier risk management.
|5 year||10 year||15 year|
|Annual returns||6.9%, beats by 2.6%||9.8%, beats by 0.4%||6.4%, beats by 0.2%|
|# peer funds / ETFs||101||87||73|
|Sharpe||Top 7%||Top 10%||Top 16%|
|Maximum drawdown||Top 4%||Top 5%||Top 12%|
|Standard dev||Top 6%||Top 5%||Top 5%|
|Downside dev||Top 5%||Top 6%||Top 5%|
|Down market dev||Top 5%||Top 6%||Top 8%|
|Bear market dev||Top 4%||Top 5%||Top 8%|
|Downside capture / Sp500||Top 7%||Top 7%||Top 8%|
Data from Lipper Global Data Feed, calculations from MFO Premium, as of 5/30/2020
How do you read that table?
Annual returns simply measure the fund’s gains which, in every time frame, beat its peer group.
Sharpe ratio weighs the gains against the risks investors were exposed to. QRVLX’s Sharpe is both top tier and rising.
All of the other metrics are different ways of measuring the risks that investors were exposed to: largest decline, day-to-day volatility, downside or “bad” volatility, volatility in months when the market fell even a little, volatility in months when the market fell more than 3% and amount of the S&P 500’s losses that the fund “captured.” In each case, QRLVX is among the elite performers.
What explains the steady outperformance?
Three factors might plausibly explain it.
First, Mr. Scruggs keeps his eye on the long-term drivers of returns and actively screens out the short-term noise. While he recognizes and worried about, the “severe and uncertain crisis” created by the Covid-19 pandemic and the “unprecedented” involvement in markets by central banks, he also acknowledges that we don’t know the near- or long-term economic effects of either, so neither can drive the portfolio. He remains focused on finding individual stocks that “provide a reasonable expected return and an adequate margin of safety.”
Second, he has a less mechanical view of “value” than most. He argues that the appropriate measures of a firm or industry’s valuations evolve with time. That evolution requires some rethinking of the importance of both physical capital (reflected in price-to-book ratios) and intellectual capital in assessing a firm’s value. That’s led him, he reports, to buy some value stocks that purely mechanical metrics might describe as growth stocks.
Third, he maintains a portfolio of higher-quality companies. My Morningstar’s estimation, only 3% of the QRVLX holdings lack an economic “moat.” That’s compared to 10% in his average competitor’s portfolio. Similarly, the QRVLX portfolio has higher grades for financial health, profitability, and growth (measured by growth in long-term earnings, book value, cash flow, and sales).
What about the ETF option?
Passive investing products look best when markets are rising steadily and smoothly; they are designed to capture that rise. Markets, however, cannot permanently deliver steady and smooth gains: they outrun fundamentals, become giddy, overshoot, correct, become panicked, overcorrect. The best managers create long-term value by protecting their investors’ portfolios from the destructive effects of the market’s extremes.
Viewed purely through the lens of capital protection, there is no passive product – either cap-weighted or smart beta – that has offered as much protection as Queens Road. That’s true in all three time periods: 5, 10, and 15 years.
Viewed through the lens of risk-return rewards, as measured by Sharpe ratio, there is precisely one ETF that has a higher 5- and 10-year Sharpe ratio; WisdomTree US LargeCap Dividend (DLN) has provided somewhat higher returns at the price of somewhat higher risks. Beyond that, $40.5 billion is currently invested in ETFs with lower 5-year returns, higher risks, and lower Sharpe ratios than Queens Road. It speaks to the triumph of marketing and herd-like behavior over performance.
Equity investors wary about high valuations, untested business models and volatile markets have cause to be more vigilant than ever about their portfolios. Queens Road Value has a record that makes it a compelling addition to their due-diligence list.
Queens Road Funds. While there are separate fact sheets for each fund, there doesn’t seem to be a page dedicated to each. Readers interested in Mr. Scruggs reflections on the high current levels of noise in the markets and how he approaches it might profit from his April 2020 commentary.