Podcast Center
Video Center
Webcasts
Resource Center
Events
June 11, 2004 at 08:00 PM
Quick Take: To cope with the great variety of small-cap stocks, George Henning avoids a ‘one size fits all’ approach when managing Pacific Advisors: Small-Cap Fund/A (PASMX). Henning considers different investment criteria for stocks in different industries, along with top-down trends and technical analysis.
Recently, Henning has been focusing on the rising economy, particularly energy and transportation stocks. Going forward, he expects the consumer product and industrial sectors will gain, followed by financial services.
The portfolio has generated stellar gains lately. For the one-year period through May, it rose 84.4%, versus a 30.8% increase for small-cap value funds. Over longer periods, the fund has outperformed its peers, though not as dramatically. For the three-year period through April, it gained 12.4%, on average, versus a 10.3% rise for its peers.
However, the Pacific fund’s volatility is far above the category norm based on three-year standard deviation — 25.8% versus 18.18%. Henning says if you feel strongly about a holding, you shouldn’t limit your potential gains. Indeed, the manager prefers bigger stock weightings than his peers. The fund is very concentrated, holding about 40 small-cap companies.
Another thing to keep in mind is that the portfolio currently charges very high expenses of 4.44%, almost three times as high as its peers, making it much more expensive to own for small-cap exposure. However, fees should decline as the fund continues to gather assets. A-class shares carry a 5.75% front end load.
The Full Interview:
S&P: What is the fund’s investment strategy?
HENNING: We look for undervalued companies with catalysts for growth. We measure companies differently based on the industries they’re in. It doesn’t make sense to only consider price/earnings ratios when industries have different average p/e ratios. Over the years, I’ve found debt may be good for one company, while zero debt may be best for other companies. That’s why talking to company management is important, especially for small-cap stocks.
I try to keep a small number of holdings since following a lot of companies is difficult in the small-cap market. Right now, we have about 40 companies, which is higher than what we typically have.
S&P: How do you compare stocks in different industries?
HENNING: I make judgments based on a number of things. I tend to look at companies for awhile, sometimes for more than two years, before I invest in them. Information about small-cap companies is often limited, so it can take a fair amount of time to understand a company.
S&P: Do you consider any top-down criteria in picking stocks?
HENNING: I pay attention to technical analysis to see which sectors are performing well. This helps to measure how companies stack up against each other. It also helps to decide which positions to add to. Usually, I add to existing positions rather than start new positions.
S&P: Which areas of the market currently look attractive?
HENNING: The economy is growing, but I don’t think it will overheat. The industrial and energy areas look good, as does consumer products. Right now, I’m looking at manufacturing, because of steel shortages, the dollar’s valuations, and rising energy costs. When the market pulled back about six weeks ago, I bought Titan International (TWI), a wheel and tire producer.
