Fund in Focus: Northern Small-Cap Value Fund

Feb. 8, 2005 — When portfolio manager Robert Bergson joined the Northern Small-Cap Value Fund (NOSGX) in the summer of 2001, it invested in growing companies and shares viewed as undervalued, but it leaned towards cheap stocks.

Since then, the $479-million fund has moved firmly into the value camp. Bergson, who leads the team that oversees the portfolio, explains that Northern Trust Investments wanted to differentiate Small-Cap Value from similar funds it offered that focused on small companies.

One thing hasn’t changed, though: It still uses a computer program to determine which stocks to buy and sell. Bergson is a member of Northern’s quantitative management group, and a quantitative approach lead the fund to a return of 22.6% last year, versus a gain of 19.7% for the average small-cap value fund.

Northern Small-Cap Value outpaced its peers over the three years ended in December, but it lagged them over the five years ended that month. The fund returned 17.6% and 13.3%, on average, during those periods. By comparison, its peers rose 14.6% and 15.2%.

In screening potential investments, the fund’s program filters out shares priced low compared to a company’s book value, earnings, sales and cash flow. Then it considers gross margins, looking for improving levels.

The fund hunts for profitable companies that are generating cash and whose bottom lines are expanding faster than others in their business or industry.

The model is designed to exclude companies whose financial picture is fading, so those carrying a lot of debt relative to their competitors don’t make the cut.

Overall, the program is intended to identify stocks that have low multiples because they’ve been unfairly valued by the market, not because a company is in trouble, Bergson says.

“We have a whole lot of companies that are priced as though they are distressed,” he says. “We want to weed out those that really are.”