Quick Take: Investors shouldn’t get too confident, says Grant Sarris, manager of Waddell & Reed Advisors Small Cap Fund/A (UNSAX). Heeding that warning, Sarris himself aims for a mix of stocks with various growth profiles, and limits each of his holdings to no more than 5% of the portfolio. The manager’s goal is twofold: avoid disasters during down markets, and perform in line with the market during upturns.
Based on the fund’s overall returns, Sarris seems to be meeting his objectives. This year through April, the fund rose 9.4%, versus a 4.1% rise for its small-cap growth peers. For the three years through April, the fund fell an annualized 6.6%, while its peers lost 17.3%.
The Full Interview:
S&P: What do you look for in small-cap stocks?
SARRIS: I try to buy smaller companies that can become a lot bigger in three years. Our turnover — currently about 25% — is low relative to other growth funds because of our three-year time horizon. In general, a low turnover strategy works best: The fewer decisions you make, the fewer bad ones you make.
S&P: How do you structure the portfolio?
SARRIS: I try to have a mixture of stocks with different risk profiles that is balanced, including some speculative stories with great potential, some out-of-favor stocks, and some steady growers. I never let a stock become more than 5% of the portfolio. Whenever you get that confident, you’re usually wrong.
S&P: You seem cautious about overconfidence?
SARRIS: Making a big bet on one company is a dangerous thing. I try to run a reasonably concentrated portfolio — about 50 holdings — but I don’t want one holding to stand out over everything else. A lot of times, your best ideas are the ones that you’re not that confident in. You won’t bet the ranch on them, but they end up working really well.
Our overall goal is to avoid disasters and keep people’s money when things aren’t going well. Then, we try for market performance when things are going well. I’ll probably always be a little more conservative than my brethren.
S&P: What’s your approach toward risk?
SARRIS: I’m a bit of a contrarian. If I feel investors are avoiding risk, I’ll take on a little risk, and if people are taking on too much risk, I may back off from risk and focus on steady growers. It’s impossible to judge risk, you have to feel it. You know if your portfolio is less risky if you can sleep at night.
S&P: How is the portfolio currently positioned?