August 2020 IssueLong scroll reading

FPA Queens Road Small Cap Value (formerly Queens Road Small Cap Value), (QRSVX), August 2020

By David Snowball

At the time of publication, this fund was named Queens Road Small Cap Value.

Objective and strategy

The fund seeks capital appreciation by investing in the stocks or preferred shares of U.S. small-cap companies. Small caps are companies whose stocks are, at the time of purchase, valued at under $5 billion. 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 on estimates of intrinsic value using free cash flow and book value growth models.).

In general, the portfolio holds 50-60 names (currently 49) and currently has 15% in cash.  The manager notes that while “we like to keep the money invested, we don’t want to make bad investment decisions. If there aren’t names that meet our criteria, we will let cash build.”


Bragg Financial Advisors, headquartered in Charlotte, NC. Bragg was founded in 1964, provides investment services to institutions and individuals, and has approximately $1.8 billion in assets under management as of June 30, 2020. Bragg serves as an advisor to the two Queens Road funds and to approximately 400 high net worth families. 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, the Queens Road Value Fund (QRVLX), and separate accounts using the same value strategy. That’s about it. No hedge funds or other distractions. He is supported by Matt Devries, CFA.

Strategy capacity and closure

Not determined.

Active share

95.24%. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management, which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. The “active share” research done by Martijn Cremers and Antti Petajisto finds that only 30% of U.S. fund assets are in funds that are reasonably independent of their benchmarks (80 or above) and only a tenth of assets go to highly active managers (90 or above).

QRSVX has an active share of 95.2, which reflects a very high degree of independence from the benchmark assigned by Morningstar, the Russell 2000 Value.

Management’s stake in the fund

As of the most recent Statement of Additional Information, Mr. Scruggs has invested about $400,000 (0.3% of fund assets) in his fund. All of the fund’s trustees have invested in it, with five of six trustees having invested over $100,000. The officers of Bragg Financial, including Mr. Scruggs, collectively own 1.7% of the fund’s shares.

Opening date

June 13, 2002.

Minimum investment

$2,500 for regular accounts with a surprisingly high subsequent investment minimum of $1,000; the minimum is $1,000 for tax-advantaged accounts

Expense ratio

1% on assets of $514.8 million.


In conjunction with our August 2020 story on the partnership between the Queens Road Funds and FPA, under which the long-closed, $200 million FPA Capital (FPPTX) fund will eventually merge into Queens Road Small Cap Value, we wanted to share a quick profile of the fund.

Queens Road Small Cap Value shares an investment discipline with its larger-cap sibling, Queens Road Value. The strategies for both funds are easily explained, sensible and repeatable: buy a reasonable number of well-run companies (signaled by their strong balance sheets and management teams) when their stocks are substantially discounted (using free cash flow and book value growth models.). Then hold them until something substantially changes, which leads to a relatively long, relatively tax-efficient holding period.

Because the manager’s view of “value” is less mechanical than many of his peers’, he tends to own some stocks that are somewhat “growthier” than average. As a result, the two major rating services – Morningstar and Lipper – classify the fund somewhat differently. Morningstar places it in the “small value” peer group, while Lipper assigns it to “small core.”

Since Mr. Scruggs targets outperformance over the full market cycle rather than trying to “win” every quarter or every year, we used the screener at MFO Premium to measure the fund’s long-term performance against both small-value and small-core peers.

By every measure, across time and against both peer groups, Queens Road Small Cap Value produced competitive returns with virtually unparalleled downside protection.

QRSVX performance over a full market cycle, 10/2007 – 12/2019

  Small-cap value peers Small-cap core peers
Annual returns 6.7%, beats by 0.5% 6.7%, trails by 0.4%
# peer funds / ETFs 71 249
Sharpe ratio #3 #42
Maximum drawdown #4 #10
Ulcer Index #2 #5
Standard deviation #1 #4
Downside dev #1 #4
Down market dev #2 #4
Bear market dev #2 #5

Data from Lipper Global Data Feed, calculations from MFO Premium, as of 6/30/2020

How do you read that table?

Annual returns measure the fund’s gains, which is a bit above the average small value fund’s and a bit below the average small-core fund’s.

Sharpe ratio weighs the gains against the risks investors were exposed to. They rank in the small value elite and the top tier (top 18%) of the growthier small-core group.

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, against both groups, QRSVX is among the elite performers.

What explains the steady outperformance?

In looking at Mr. Scrugg’s other funds, we suggested that 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 worries 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).

Bottom Line

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 Small Cap Value has a record that makes it a compelling addition to their due-diligence list.

Morningstar recognizes Queens Road as a five-star fund, an assessment of their past performance, and a Gold-rated fund, a recognition offered to “strategies that they have the most conviction will outperform a relevant index, or most peers, over a market cycle.” We concur.

Fund website

Queens Road Funds.

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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.