One of the top small value performers this year, beating out the broader market and its peers is a small Cincinnati-based fund with a slightly quirky investment strategy, according to data from Morningstar. The Auer Growth Fund is small value fund with $34.6 million in assets under management. So far this year, it is up 13.39% compared to the S & P 500’s roughly 10% drop. That’s the top 1% of performance compared to other small value funds. Its longer-term performance has been rockier. Over the last five years the fund has outperformed the category index – the Russell 2000 Value Index – by 4.8 percentage points and surpassed the average return in the category by three percentage points, according to Morningstar. But, over a 10-year period, the fund has underperformed the index by 1.2 percentage points. Since its inception in Dec. 2007 through the end of June, the fund has returned 1.27% compared to the S & P 500’s nearly 9% return, according to information from SB Auer Funds LLC, the fund advisor. In fact, its ranking this year is a bit of redemption for Auer Growth and its strategy – in 2018, the fund was ranked in 100th percentile (last place) in Morningstar’s small-blend category. While it jumped to the 16th percentile in 2019, it fell to 93 rd percentile in 2020. About five years ago, however, Auer Growth modernized its stock-picking strategy and how its weighs those names in the portfolio, which has helped its performance, according to Eric McKenzie, portfolio manager of the fund. Stock picks and holdings The fund’s current investment strategy is a relatively simple one. “We look for high-performing stocks at a deep discount,” said McKenzie. The management team has three main criteria when it comes to picking investments, he said. Companies must have quarterly year-over-year revenue growth of at least 20% and quarterly year-over-year earnings growth of at least 25%. In addition, the stock must be trading at a price-to-earnings ratio below 12 to be included in the portfolio. Beyond these parameters, the fund doesn’t limit or target any specific sectors or company sizes. Instead, it’s looking for solid performance. “We really are a true go anywhere fund,” said McKenzie. The fund’s most heavily weighted stocks include energy, health care, technology, industrials and consumer names. The fund rebalances on a quarterly basis and sticks to its criteria to determine what stays in the portfolio. If a stock in the portfolio no longer meets its investment criteria, it’s dropped and replaced by one that does. In the quarter ending June 30, the fund picked up three new names. It also bought more shares of current investments, such as homebuilders M.D.C Holdings and PulteGroup . Going forward, the advisors think the fund is well positioned to perform and are confident that it will be able to find companies with increasing sales even if the U.S. falls into a recession. “We’ve been really happy with what the portfolio has done and really 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 peers, according to Morningstar’s analysis.
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