Top U.S. stockpickers keep low profile

 By David Randall NEW YORK, Dec 4 (Reuters) - The co-managers of the best
stock mutual fund of this decade work out of a small office in
Los Angeles, rarely talk with the financial media and have never
appeared as guests on CNBC looking to raise their profile. Instead, portfolio managers Todd Beiley, 47, and Jon
Christensen, 55, lead a team of five analysts who evaluate all
companies in the Russell 2000 small cap index each year
for signs of a competitive advantage. The time-consuming process has helped the $5.2 billion
Virtus KAR Small-Cap Growth fund outperform every other actively
managed mutual fund during the 10 years that closely
corresponded with longest bull market in history, according to
Morningstar data. With less than a month left in the decade, which opened nine
months after the equity market bottomed during the financial
crisis, the fund has posted a total return of 441% through
November, including reinvested dividends. That performance is 20 percentage points greater than any
other actively managed U.S. equity mutual fund, the Morningstar
data showed. The Russell 2000 gained approximately 190%, while
the S&P 500 returned 281% during this decade. "We're not necessarily looking for the fastest-growing
companies or those positioned in the right sectors for a macro
trend, but businesses that can maintain a competitive position
for a long period of time," Beiley said. He noted that many of
the companies the fund holds have few if any analyst coverage on
Wall Street. Despite the fund's success, its greatest challenge now is
staying relevant. Over the last decade, the proliferation of
low-cost index-based investing and exchange-traded funds has
made stockpickers a relic of a time before the 2008 financial
crisis, when investors were willing to shell out high fees for
active management. Lower-cost passive management now accounts for 45 percent of
all assets in U.S.-based stock funds, nearly double the 25
percent invested in passive funds a decade ago, according to the
Investment Company Institute. Many active managers are
struggling to draw new clients. "Increasingly investors are looking at the fee a fund
charges and making that a higher priority than the performance
record," said Todd Rosenbluth, head of ETF and mutual fund
research at independent research firm CFRA. "There are more and
cheaper options than ever before." Beiley and Christensen's fund began concentrating its
portfolio several years ago in fewer companies to differentiate
it from its benchmark index. That also increased its risk and
potential rewards. Over half of its assets are invested in 10 stocks, a group
that ranges from auto parts maker Fox Factory Holdings Corp to trucking company Old Dominion Freight Lines Inc to electronic signature service DocuSign Inc ,
which had its initial public offering in 2018. The fund adds an average of two to three new stocks a year
to its holdings of roughly 30 companies, and Beiley and
Christensen are happy to invest in seemingly "boring" industries
like trucking and used car sales. Yet their performance is anything but dull: shares of
Paycomm Software Inc , an online payroll provider, are
up 126 percent since the start of the year, while shares of
auto-salvage auction company Copart Inc are up nearly
85 percent. "Our objective is to buy small and let the investment
appreciate over time," Beiley said. The fund typically makes an
initial purchase in a company when it has a market value between
$1 billion and $4 billion. Beiley and Christensen did not know of their
industry-topping performance until they were informed of it by
Reuters, but said they have no plans to capitalize on it. The
fund is closed to new investors and there are no plans to open a
new one. Both managers work on other small and mid-cap core funds at
Virtus, which also have returns in the top 10 percentiles of
their peers, according to Morningstar. They will likely continue on the same path of looking for
fundamental strengths at a time when the broad market is
increasingly made up of passive investors, a trend they expect
will have a greater impact on small-cap shares in the next
decade. "We're well aware of the passive trend, and frankly I can't
argue with it," Beiley said. "If you're charging a high fee and
not providing a higher service, then it's hard to justify." (Reporting by David Randall; Editing by Alden Bentley and Dan
Grebler) 

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