From the February 2012 issue of Investment Advisor • Subscribe!

Growth With Value: Ford Draper Jr.

Founder/President, Kalmar Investments

After 40 years in the business, Ford Draper Jr. has seen it all—except something akin to current market volatility. That fact alone should make us stand up and take notice. But Draper, founder and president of Kalmar Investments, is taking it in stride—research-heavy, time-tested stride, that is. The man with the coolest name in investing spoke with Investment Advisor about the always interesting small-cap space and his cure for the motion sickness that ails investors.

It’s been one heck of a ride in the small-cap space. Are things getting better?

They are. There are all manner of strategists that have been suggesting for the last several years that small caps wouldn’t be as competitive as large caps, wouldn’t be as competitive as emerging markets and the like. Yet, domestic small caps have had a better record than both of those asset classes for several years now, and we’re pretty optimistic going forward.

Your investment philosophy is “growth with value.” Can you elaborate?

Growth with value is, we think, a uniquely productive investment philosophy that is devoted to capturing high business-value growth within companies and enhanced by valuation disciplines. What we’re trying to do is to identify better quality smaller companies that are entering a sweet spot of several-year forward growth that is not appropriately appreciated by other investors. And, thus, to buy those shares inefficiently, to undervalue against that proprietary earnings power edge and enjoy both a better upside as well as  lower volatility and less downside in the bargain. Happily, we’ve got a 30-year record of being able to accomplish that.

After 43 years in the business, have you ever seen markets like this?

I’ve never seen anything like this in terms of volatility, for sure. I have never seen a market that’s so totally captivated by macro and political policy issues. One of the beauties of a style like this is that one can afford to be somewhat more consciously agnostic of those diversions. Since we’re almost exclusively bottom-up oriented, we’ve got a several thousand company universe to pick through for smaller businesses undergoing pretty dynamic change. We can create exciting investment ideas that ought to be able to strive against the whole range of macroeconomic environments. We focus less on trying to puzzle that out and more on the discovery and vetting process that leads to top-notch ideas.

Do you still get out there and kick the tires on these companies?

Absolutely. There are 23 of us here at Kalmar (14 partners, by the way, which is quite unusual). Nine of us are on the full-time research team. I happen to be the team leader. I’m out doing engine diagnostics as well as tire kicking, both internally as well as externally, and everybody on the team is doing the same thing.

Let’s talk performance. How have you done recently over a three- to five-year period?

We’ve been very fortunate over the firm’s 30-year history, through six full market cycles and, who knows, three-quarters of this one. We’ve produced higher returns than the associated asset class and our peer group, with lower risk and volatility. At the moment, we’re modestly positive year-to-date against about a negative 3%, or something like that, for the Russell 2000 Growth Index. On a 12-month basis, we’re similar, except the Russell 2000 Growth Index is off about 4.5% or thereabouts. If you were to look on a peer group basis, you’d find that we’re in the 25th percentile on 3-, 5-, 7- and 10-year basis. So what you get is truly a higher return with a lower risk approach, with lower turnover and volatility, and it makes for a pretty appealing product.     

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