Here’s a simple formula. Four CFAs plus a five-step due diligence process equals solid performance for the money managers at TAMRO Capital Partners and their Aston/TAMRO Diversified Equity Fund (ATLVX). Sure, it relies on core investing principles like value, management and momentum, but it is so much more, as hyper-enthusiastic managers Philip Tasho and Tim Holland are happy to explain.
“We’re trying to identify companies with a strong core business, where they have built leading market share in their prospective product or service category,” Tasho says. “No. 2, they have an experienced, tenured management team. Lastly, we look for companies that have flexible financials and, importantly, we note how they allocate capital over a long period of time.”
All well and good, but the same could be said about a gazillion funds now in existence. How is this one different?
“We’re very opportunistic,” Holland says. “Our large-cap core fund can dip down the cap spectrum; so we’ve had small- and mid-cap exposure, which can be looked at as the large-cap leaders of tomorrow. The other thing that separates us is that while we’re very sensitive to evaluation and the price you pay, we also want to see companies with nice growth profiles. We reject as faulty the idea that managers, particularly an equity manager, should live strictly in a value box. We’re just looking for the next great investment idea, regardless of whether or not it falls along that classic value spectrum.”
Tasho started out “many moons ago” as a securities analyst in 1980. After 20 years on the investment side in the banking industry, he helped found Alexandria, Va.-based TAMRO Capital Partners.
“That was in June of 2000,” he reminisces. “We had $3 million when we started, and here we are today at $ 1.6 billion.”
Holland took a more circuitous route to his present position. The New Jersey native came from the PR world, specifically in investor relations whose clients were mainly capital market firms.
“After seven years of media relations, I found I was more interested in what my clients were doing for a living than what I was doing for them,” he explains. “So I took a chance and went to a small hedge fund, got my CFA and after five years decided to join TAMRO.”
He adds that although both he and Tasho are “CFA financial professionals,” they both have liberal arts backgrounds, which gives them more of a “creative bent that lends itself to good stock selection and the ability to put companies and markets in perspective when a lot of people can’t see the forest for the trees.”
The 16-person firm is 70% owned by employees, with Tasho the largest individual owner. But Tasho and his family are also the largest shareholders in the Diversified Equity Fund—significant “skin in the game” that is sure to get him high marks with Morningstar’s stewardship grades.
Now, about that five step process:
“It begins with a scoring system,” Holland says. “All we’re doing there is taking small-cap, mid-cap and large-cap stocks and scoring them on a combination of growth and value characteristics by industry. We’ll focus on companies that scored first or second percentile as potential investment ideas. We’re very much bottom-up fundamentally driven. But we use the scoring system as a great idea generator and focus tool for the folks at TAMRO.”
If a company scores well, Holland explains, they move on to peer analysis by using an industry matrix developed by Tasho that is populated with tickers (including the stock under consideration and those of its peers) and analyzed by 13 factors. This includes top- and bottom-line growth, return on invested capital, inside ownership and others. They then rank the companies by average share price performance annualized over 10 years.
“While we believe the market is inefficient near term, long-term the cream rises to the top,” Holland adds.
The stocks also fall in one of three distinct investment categories: leaders, laggards or innovators. “Leaders” are just what they sound like: best in class companies that have tenured management and track records of success with historical outperformance. When plugged into the matrix they rank toward the top.
“Innovators” are essentially leaders in businesses like technology or health care IT, where a company maintains its edge through R&D, acquiring new technologies and the like. Innovators, Holland says, also come out toward the top of the matrix.
“Laggards” are turn-around candidates that have yet to turn around. They have a good core business, good core financials, but they’re missing one of the three things TAMRO is looking for, which is a leadership team.
What’s exciting about turn-around candidates is new leadership brought in to turn the business around, Holland says. Unsurprisingly, laggards come out at the bottom of the matrix, but that change in leadership creates opportunity.
“The matrix helps us identify depressed companies that may be very close to potentially getting things right. So the first two steps of the five-step process are quantitative in nature.”
The next step is company analysis.
“Here’s where we do two things; we focus on the company’s competitive advantage,” Tasho explains. “We want to make sure their moat is sufficiently deep and wide. We also want to understand the senior management team, their competence and how they interact. So we want to understand that relationship and how long they’ve been there and how successful they’ve been. Lastly, we look at how innovative they are. After the analysts have looked at these three components, then it’s a question of what we pay for it.”
So what qualifies them for the “overlooked manager” tag, one that means relatively low assets under management that nonetheless outperform?
“In terms of the asset size, the diversified equity strategy has approximately $23 million invested,” Holland says. “If you look at the long-term performance of the diversified equity strategy, the three-, five- and 10-year numbers are incredibly competitive. We had a tough 2011, but we’re having a very good start to 2012.”
Holland points to a small-cap core strategy that has a 10-year track record and “north of $1 billion in it.”
“So all in, the strategy that we employ is a $1.5 billion dollar product. The focus has really been, from a business prospective, domestically on small-cap core, not on diversified equity. As we grew and finally closed small cap, we pivoted and are now trying to get the word out about this [diversified equity] product because the numbers are great. The same people produced a tremendous result on the small-cap side.”