According to Morningstar data, a small fund from Cincinnati is one of the top performers in small value this year, beating the broader market and its competitors with a slightly idiosyncratic investment strategy. The Auer Growth Fund is a small value fund with $34.6 million in assets under management. So far this year, it’s up 13.39% compared to the S&P 500’s roughly 10% drop. That’s the top 1% of performance compared to other low-value funds. His longer-term performance was rockier. According to Morningstar, the fund has outperformed the category index — the Russell 2000 Value Index — by 4.8 percentage points over the past five years, outperforming the average return in the category by three percentage points. But over a 10-year period, the fund lagged the index by 1.2 percentage points. Since its inception in December 2007 through the end of June, according to information from SB Auer Funds LLC, the fund advisor, the fund has returned 1.27% compared to the nearly 9% return of the S&P 500. In fact, this year’s ranking is a bit of a redemption for Auer Growth and its strategy – in 2018, the fund was in the 100th percentile (last place) in Morningstar’s small-blend category. While it jumped to the 16th percentile in 2019, it dropped to the 93rd percentile in 2020. About five years ago, however, Auer Growth modernized its stock selection strategy and the way it weights those names in its portfolio, which has helped its performance, said Eric McKenzie, the fund’s portfolio manager. Stock Selection and Positioning The fund’s current investment strategy is relatively simple. “We look for high-performing stocks at a big discount,” McKenzie said. The management team has three main criteria when it comes to choosing investments, he said. Companies must have a quarter-over-year revenue growth of at least 20% and a quarter-over-year profit growth of at least 25%. In addition, the stock must trade at a P/E ratio of less than 12 to be included in the portfolio. Outside of these parameters, the fund does not restrict or target specific sectors or company sizes. Instead, it looks for solid performance. “We really are a fund that goes everywhere,” says McKenzie. The fund’s most heavily weighted stocks include energy, healthcare, technology, industrials and services and consumer names. The fund rebalances on a quarterly basis and adheres to its criteria for determining what remains in the portfolio. If a stock in the portfolio no longer meets its investment criteria, it is removed and replaced with a stock that does. In the quarter ended June 30, the fund picked up three new names. It also bought more shares of current investments, such as homebuilders MDC Holdings and PulteGroup. Going forward, the advisers believe the fund is well positioned to perform and are confident it will be able to find companies with increasing sales even if the US enters a recession. “We are very pleased with what the portfolio has done and are very humble about the whole process,” said McKenzie. The actively managed fund has a total gross expense ratio of 2.37%, which is generally higher than its competitors, according to Morningstar’s analysis.
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