The message was straight and to the point.
"We buy small-cap value stocks," says Robert Bergson, portfolio manager of the aptly-named Northern Small Cap Value Fund.
That veteran manager Bergson feels compelled to emphasize his Fund's strict adherence to its style objective might seem unnecessary. For some funds, though, staying put isn't always so assured. The result can be so-called style drift — and lots of unhappy asset allocators who thought they bought one thing and wound up with another.
"Our shareholders can feel confident that we'll fill the small-cap value bucket for them," Bergson says. "And we'll do it with sensitivity to cost and risk."
Smaller tax bite
Bergson takes a buy-and-hold approach to his 500-plus stock portfolio, which has beaten its benchmark over the last three-, five- and 10-year periods as of 12/31/2012.
"Transaction costs can be higher in small caps," he says. "Our stock selection model is designed to reduce turnover."
Indeed, the Fund's turnover rate of around 20% is about five times lower than that of the average stock fund.1 By one estimate, annual turnover of 100% can subtract one percentage point from a fund's performance each year.2
But holding down transaction costs might lead to another benefit for shareholders: fewer taxable events.
"Less turnover usually translates into a smaller tax bill," Bergson notes. And that could be no small victory given increased capital gain tax rates in 2013.
The Northern Small Cap Value Fund employs an actively managed quantitative system designed to identify profitable companies whose shares are reasonably priced relative to traditional valuation metrics like book value and price-to-earnings. Bergson is especially keen on avoiding companies exhibiting hints of financial distress, and has devised a proprietary model to red-flag businesses headed for such trouble.
"Our Fund takes risk management seriously," he says, "so we don't make bets on turnaround situations."
Of course, lower-risk stocks don't always outperform their dicier cousins. Over time, however, Bergson thinks discretion is the better part of valor.
Bergson also thinks that domestic small-cap stocks could be positioned to outperform since they are less dependent on struggling overseas economies.
"We like our companies and we like the small-cap value space," he says. This, he adds simply, is exactly where you'll find his Fund.
Equity Risk: Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Small Cap Risk: Small-capitalization funds typically carry additional risks since smaller companies generally have a higher risk of failure. Their stocks are subject to a greater degree of volatility, trade in lower volume and may be less liquid.
Value Risk: Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
Book Value to Price is a ratio used to compare a stock's book value to its market value. It is calculated by dividing the latest quarter's book value per share to the current price of the stock.
Price-to-earnings ratio is the current share price of a stock divided by its earnings per share.
1 "The Case for Low-Turnover Funds." Laura Cohn. "Kiplinger." March 29, 2010.
Not FDIC insured | May lose value | No bank guarantee
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