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Small-Cap Equity, Cash Secret to Intrepid Capital Fund’s Success

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Money manager Mark Travis will never be all things to all people, and that suits him just fine.

“We have capacity constraint, where we can’t really manage more than $3 billion,” the president and portfolio manager of the Intrepid Capital Fund told AdvisorOne at the 2012 Morningstar Investment Conference in Chicago on Wednesday. “If I ever find I’m simply hugging an index and not providing real value, I’ll go hunting or fishing or something else.”

He has a down-home, good-old-boy attitude that, while charming, masks a sophisticated individual (seemingly intentionally so) who knows how to make money for his clients. In addition to his duties as lead portfolio manager of the Intrepid Capital Fund, he’s a member of the investment teams responsible for the Intrepid Small Cap Fund, Intrepid Income Fund and Intrepid All Cap Fund.

“For 17 years, I’ve been contrarian and valuation sensitive,” said the Jacksonville, Fla.-raised Travis, who also happens to be a major Tim Tebow fan. “If I don’t find something good in which to invest based on valuations, I’ll go to cash.”

Intrepid Capital Funds has assets of $1.4 billion, with $370 million in ICMBX. Travis believes price is not always indicative of value (obviously), so strategy is driven by internal research that focuses on a business’s value–not changing stock prices.

The Intrepid team brags it’s good at finding value in stocks not readily covered by Wall Street, and it typically invests in businesses with sustainable competitive advantages, high free cash flows and quality balance sheets. It also believes in financially strong companies that are market leaders in their industries, those have an ability to outperform when “catalysts for change exist” and can be purchased as a sizeable discount.

“We’re not set up with infinite amounts of capital, so we feel it’s less efficient to be fully invested,” he added. “With cash on hand, it means we can buy at the most opportune time.”

It seems to be working, as the fund is rated with five stars and resides in the top percentile of its peer group. As for performance, it is the envy of many of the managers at the conference: up 1.6% year to date (as of June 11); 11.1% annualized return over a 3-year period, ranking in the top 21st percentile; and a 5.8% annualized return over 5-year period, ranking in the (aforementioned) top percentile.

“We have consciously built our firm to limit what we do,” he said. “We invest in companies with a $300 million market cap up to the Microsofts on the high end. We can go anywhere; we just invested in a number of Japanese video game companies right after the tsunami. What I mean by ‘limiting what we do’ relates to the size of the fund and the possibility of growing too large.”

He’s finding alpha in the small-cap equity space. On the fixed income side, he likes cash or treasury bills.

“I feel we’re an all-weather, off-road tire,” he concludes, lapsing back into his southern parlance. “We like our capital to compound without worrying too much about volatility. We’re not for everyone, but I believe there’s more than one way to get to investment heaven. Let’s hope we all get there.”


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