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Bottom Line article: Microcap funds

Bottom Line is a sort of cool "a bit of this and a bit of that" newsletter that covers personal topics from finance to nutrition and scholarship sources. I contribute occasionally. The schtick is that they assess reader interest in various topics and one of the writers reaches out to talk with me. We talk. I share thoughts and data. He filters it through his sense of what would engage readers, drafts an article and the editor sends it back with a "is this about right?" query. Nominally I'm the author. It's unpaid (which is fine) though I do get five copies of the newsletter to share with friends.

The most recent exchange was on microcap funds. You get some idea of the constraints under which the writer works when you realize that the entire article is exactly 250 words, only slightly shorter than the greeting on my voicemail.

The premise is that microcaps are profoundly undervalued relative to a bunch of measures and tend to perform exceptionally well when interest rates begin to fall, since that often signals a period of economic acceleration. I think my screen identified 10 (?) options and Mark picked up on three.

I wish he'd included Pinnacle Value (PVFIX) which is a five-star fund. Shallow observers will say "he's been in the bottom 10% of his peer group four times in the last 10 years." Those who look closer might note that his market cap is one-twentieth of his peer group's and he's posted double-digit absolute returns in three of those four years. 2017 is the only actually bad year. Since inception is Sharpe is 50% above the group's and standard deviation is half of the group's. But John's down to $34 million in assets; as a one-man show he will soldier on, but he deserves more serious attention.

He just shared his latest annual report. He's a laconic guy, so I don't expect it will take long to finish. If there's something cool, I'll post it separately.


  • edited March 6
    how confident are you the fund will be around? if we invest some time in understanding it, what's the risk he decided to call it a day?
  • Why would that matter?

    This is akin to Ed Studzinski's "what if the manager gets hit by a bus?" query. Ummm ... then you reassess and either keep the fund or sell it. The response is "yes, but what about the taxes on selling it?" My thought has always been, "you're only paying taxes at sale if the manager has been making money all along and has been doing so in a tax-efficient way. In which case, it sounds like you've have a good ride, eh?"
  • I agree on the economic front. I was thinking more along the lines of mental energy and time invested.
  • John just shared his report, and likes us. If you reached out, he'd tell you. Interesting guy.
  • Not sure I ever looked at PVFIX before as I tend to stay within large and mid cap. It is a 21 yr old fund. As of 12/31/2023, holds 43% in cash. PVCMX is another small / micro cap value fund frequently mentioned in this forum that goes heavily into cash when managers do not see opportunities. I am not sure there are any similarities between the two funds in how they are managed ( their charts look different) but may be the two funds should consider merging to gain some AUM scale.
  • I owned it for 10 years or but finally sold it in 2017 when it had sorta done little.

    It looks like PVFIX has put up better results since I sold it ( of course!) and gained 24% last year while 50% in cash. Not bad
  • @Balu. Absolute return guys are the planet's most stubborn people. They know The Right Way to invest despite being subject to years of ridicule and redemption. The prospect of getting two of them to agree on a compromise through a merged portfolio / merged funds is a lot like expecting two polar bears to agree on sharing the steak.
  • edited March 6


    Not to digress but i do not have comprehension of what "Absolute Return" means, though i have seen that term used in fund name and otherwise used in the context of investing.

    "They know The Right Way to invest despite being subject to years of ridicule and redemption." I think you meant "They [think] they know . . ." Fund managers are in the business of providing a service that they feel good about and presume there is a demand for. Gathering or inability to gather AUM does not say anything about the managers' abilities within the mandates of a fund. But I know life is finite.
  • beebee
    edited March 6
    Thanks David for your linked article.

    David's Article identified OMCIX which is also mentioned in my linked article (3 of the 6 funds mentioned are Micro Caps funds):
    Oberweis Micro Cap

    Ticker: OMCIX
    Morningstar Medalist Rating: Gold
    Morningstar Rating: 5 stars

    Paradigm Micro-Cap, PVIVX, seems worth checking out as well.
  • @Balu: managers of absolute return funds strive to always produce a positive return. Relative return guys want to outperform their benchmark, absolute returns guys want to outperform zero percent.

    Their mantras:
    • "return of principal is more important than return on principal"

    • "the best way to make money is not to lose money"

    • "stocks are worth owning only when stocks are worth owning"
    In consequence they tend to have stick absolute value standards (if their calculation of the internal rate of return does not exceed 15%, say, they won't buy where relative value guys will happily snap up "the best of a bad lot"), often strict portfolio weight rules, and would rather hold cash or cash-like bonds rather than stocks that are irrationally valued.

    In general, you hope that they'll do great in market crashes and great in the first phase of the recovery, knowing that they will more-or-less quickly hit valuation concerns and begin selling down (or selling off) overvalued stocks. The problem for these guys is that the market can remain irrationally frothy for much longer than the average investor can remain patient, so after a couple years of making 15% when everybody else is making 115%, investors abandon them.

    Large firms cannot abide by the thought of money leaving, so almost all absolute return investors work on their own or in boutiques. For lists of such lonely souls, search "dry powder gang" in the main MFO search box. That is, not on the search that looks at the discussion board.

    Does that help?
  • @BaluBalu- to use the "the main MFO search box", first click on "Resources"... the search box is over to the top right on the Resources page.
  • edited March 6

    Grateful for the time and effort you took to indulge me.

    The mantras you laid out match my expectations and is consistent with the PVCMX objectives i remember reading in their fund literature, though i never owned it. I know some Absolute Return funds which do not strictly follow the mantra and with losing years. PVFIX and PVCMX seem to ty to strictly follow the mantra and I hope they succeed. I think it is important for us that funds follow their stated objectives, whatever they are.

    I do not pay attention to investor's ridicule. I see myself investing in Absolute Return mandates, and that is the reason why I remember PVCMX. Not PSPTX!

    Thanks, @Old_Joe. Now I know and hopefully I will remember why my search results are always limited.
  • MFO Home and MFO Discussions have independent searches. I think that is because they are housed in different servers that don't interact with each other or cross reference.
  • And now Franklin Templeton is changing its micro cap value fund to a small-mid cap value fund which I have owned for numerous years. I don't need another small-mid cap value fund so I guess it is time to sell it.

    I used to own Pinnacle Value Fund, but I sold it a couple of years back as well.
  • @ybb: different software. The board and its search is driven by Vanilla. The main site and its search is driven by WordPress. We used Vanilla because it was closest in feel to FundAlarm, which helped users adapt more comfortably to the new site.
  • Not exactly flying under the radar, because fund is well known to MFO members, but it may be useful to know that NEAIX/NEAGX currently holds 43% in microcaps. The fund’s moniker « aggressive growth » might lead some to think it’s yet another LCG featuring the Mag 7. The high ER I’m paying is worth it in this case, especially in light of how the PM, John Barr, manages to lose far less than others when the markets decline.
  • BenWP said:

    Not exactly flying under the radar, because fund is well known to MFO members, but it may be useful to know that NEAIX/NEAGX currently holds 43% in microcaps. The fund’s moniker « aggressive growth » might lead some to think it’s yet another LCG featuring the Mag 7. The high ER I’m paying is worth it in this case, especially in light of how the PM, John Barr, manages to lose far less than others when the markets decline.

    I own this fund and did not know the ER until you mentioned. Alternatively, I could own GUSYX for 0.90% ER!
  • I am always intrigued by the reported success of AAII "Shadow Stock" portfolio which specifically targets stocks under market caps of $300 million, which AAII claims are "better" stocks for individual investors to own.

    They sell when the market cap exceeds $900 million- this never made sense to me. Why would you sell a winner, unless it hit some predetermined % of your portfolio?

    Anyway I pulled up their published track record, compared to the Vanguard Small Cap Index, and it certainly seems that most of their reported success was between 2004 and 2013
    Their tiniest of stocks do best coming out of recessions. Their portfolio only beat the Index once since 2016.

  • That's true, @BaluBalu, but then you'd be paying Grandeur Peak whose overall record leaves a lot to be desired. Since owning Needham I've never received a shareholder letter requesting forgiveness or forbearance for weak performance.
  • edited March 9

    That was a poor joke about GP! It shows that I should stick to investing and not dabble in comedy. I cautioned the forum about GP before they blew up - I have a very low tolerance for poor governance.
  • @BaluBalu: I agree that wry humor or irony are almost impossible to convey on a discussion board. As I disdain emojis, I really don’t know how to write with a roll of the eyes or a knowing wink. GP has twisted its underwear in efforts to rewrite history, thereby providing some comic relief for those who no longer own their funds. Last time I looked, not one of their funds had exceeded the performance of their respective 3-year benchmarks. Ouch.
  • I'm sorry where do i sign up for this newsletter?
  • I subscribe to the paper copy which comes out bi-monthly for $39 per year.

    Here is a link that I found:

  • The Bottom Line Personal newsletter may also be available at your local library.
  • edited March 22

    Thank you for the insights.

    Any thoughts on PRCGX / PREOX ($215M / $100M mmc) vs PVFIX ($415M w.amc) / AVALX ($1,272M w.amc) / OBMCX (< $600M mc) / WAMVX ($1,170M amc)?

    Perritt funds invest in the smallest of microcaps. They have not performed recently, but PRCGX has done well before during economic upturns after periods of uncertainty (as partially evidenced by the 15-y 11.65% AATR under the same manager per MStar).
  • Let me poke around, yugo!
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