We've added to mutual funds to our coverage; both focus on stocks at a discount to their underlying value and both are benefiting from an investing environment that has shifted to their favor, explains Cynthia Andrade, contributing editor to MoneyLetter.
Artisan Value (ARTLX) boasts a veteran team and a solid long-term strategy. They want stocks selling at a discount to intrinsic value, which have low expectations and a favorable risk/reward outlook.
Firms must have healthy balance sheets, strong liquidity, and financial flexibility. And critical to the long-term prosperity of a business, the managers assess free cash flow and return on capital.
The portfolio typically sports 30 to 40 holdings, but despite that concentration, is generally diversified by holdings and industries.
Compared to the typical large cap fund, Artisan Value is most overweight technology, at about double the category average.
It is also overweight in the materials and consumer cyclical sectors and underweight the consumer staples and healthcare areas.
A combination of its strategy being out of favor plus disappointments in the energy and materials sectors restrained results in recent years. However, an 8.5% return this year through April 1 puts it in the top 1% of its category.
Needham Small Cap Growth Fund (NESGX) delves not just into small caps, but micro-caps, which recently accounted for more than 80% of assets.
This portfolio also holds a limited number of stocks (just 26 recently). The fund is heavily concentrated, with 73% of its assets currently in the information technology sector.
The fund's investment strategy is to invest in smaller growth companies trading at a discount to their underlying values, yet have superior long-term growth potential.
Managers Chris Retzler and John Barr look for firms that are emerging as market leads, which have strong "incentivized" management teams and have unrecognized product or operating margin expansion opportunities.
The fund many also use short selling to reduce volatility, may hold cash, and will invest in "venture-based post-IPO situations." In fact, cash recently comprised nearly 20% of assets.
Similar to Artisan, the fund also underperformed its small growth category in recent years. However, also like Artisan, Needham Small Cap has advanced nearly 8% so far this year, outpacing 99% if the small growth category.
By Cynthia Andrade, contributing editor to MoneyLetter
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