Eric Barden learned a lesson six years ago, when he ignored the biggest companies and his Texas Capital Value & Growth Fund fell more...
Eric Barden learned a lesson six years ago, when he ignored the biggest companies and his Texas Capital Value & Growth Fund fell more than 20 percent as U.S. stocks surged.
He has trounced the Standard & Poor’s 500 Index ever since.
Barden and co-manager Mark Coffelt started out favoring smaller companies a decade ago and changed the strategy after losing most of their assets in 1999, when the S&P 500 rallied for a fifth straight year and the Nasdaq Composite Index soared 86 percent. They now invest in companies of all sizes.
“In 1999, we looked like some of the stupidest managers on the planet,” Barden said from his office in Austin, Texas. “We fought the market the whole way,” as larger companies led the rally.
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These days, “we have the entire investment universe available to us, which is an incredibly potent competitive advantage,” he said.
The fund’s holdings have ranged from U.S. drug maker Johnson & Johnson, with a market value of $192 billion, to so-called microcap stocks such as Aldila, a designer of graphite golf shafts, valued at $126 million.
The $74 million fund’s biggest holdings include Caremark Rx, the second-largest U.S. manager of pharmacy benefits; Korea Electric Power, a utility that supplies almost all of South Korea’s electricity; and an exchange-traded fund that tracks Morgan Stanley Capital International’s Austria Index.
Hovnanian Enterprises and Laboratory Corporation of America Holdings, companies that Barden and Coffelt view as inexpensive relative to their growth potential, also are among their investments.
The Texas Capital fund, founded 10 years ago, beat the S&P 500 by an annual average of 23 percentage points from 2000-04.
This year, the fund had risen 9.2 percent as of Sept. 21, exceeding the benchmark’s 1.2 percent gain after reinvested dividends.
During the past five years, Barden and Coffelt’s fund has risen at an average annual rate of 19 percent, according to data compiled by Bloomberg. That ranks eighth of 92 funds that focus on companies with relatively low price-to-earnings ratios and market values of less than $5 billion.
RS Partners Fund is the top performer in the group with a 25 percent annualized return. The Texas Capital fund invests in some of the smallest publicly traded companies and compares itself against the Russell 2000 Index, as well as the S&P 500. The five-year return is about quadruple the 5 percent average gain of the Russell 2000, whose members have a median market value of $592 million.
The fund has an advantage because its assets under management are smaller than competitors, said Andrew Gogerty, a mutual-fund analyst at Morningstar in Chicago.
“It affords them the ability to dive down into microcaps if they want and gives them the flexibility to move from giant to small without impacting the market,” he said.
The other funds in the Bloomberg rankings have assets of at least $100 million.