One of the best small-value performers this year, beating the broader market and its peers, is a small Cincinnati fund with a slightly whimsical investment strategy, according to Morningstar data. The Auer Growth Fund is a small value fund with $34.6 million in assets under management. So far this year, it’s up 13.39%, compared to the S&P 500’s roughly 10% decline. That’s the top 1% of performance compared to other small value funds. His longer-term performance was rockier. Over the past five years, the fund has outperformed the category index — the Russell 2000 Value Index — by 4.8 percentage points and outperformed 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. From its inception in December 2007 through the end of June, the fund has returned 1.27%, according to fund advisor SB Auer Funds LLC, compared to the S&P 500’s return of almost 9%. In fact, this year’s ranking is a small relief for Auer Growth and its strategy — in 2018 the fund was ranked in the 100th percentile (bottom place) in Morningstar’s small blend category. While it jumped to the 16th percentile in 2019, it fell to the 93rd percentile in 2020. About five years ago, however, Auer Growth modernized its stock selection strategy and how it weighted those stocks in its portfolio, which benefited its performance, according to Eric McKenzie, the fund’s portfolio manager. Stock Selection and Holdings The Fund’s current investment strategy is relatively simple. “We’re looking for high-performing stocks at a deep discount,” McKenzie said. The management team has three main criteria when selecting investments, he said. Companies must demonstrate at least 20% year-over-year quarterly revenue growth and at least 25% year-over-year quarterly earnings growth. In addition, the stock must be trading below 12 times earnings to include in the portfolio. Beyond these parameters, the fund is not restricted or targeted to specific sectors or company sizes. Instead, it looks for solid performance. “We really are a real all-round fund,” said McKenzie. The fund’s top weighted stocks include energy, healthcare, technology, industrials and consumer stocks. The fund rebalances quarterly and uses its criteria to determine what remains in the portfolio. If a stock in the portfolio no longer meets its investment criteria, it will be eliminated and replaced with one that does. During the quarter ended June 30, the Fund added three new names. It also bought more stakes in current investments, such as construction companies MDC Holdings and PulteGroup. Looking ahead, the advisers believe the fund is well positioned to perform and are confident it can find companies with increasing sales even if the US enters a recession. “We have been very pleased with what the portfolio has performed and are very humbled by the entire process,” said McKenzie. The actively managed fund has a total gross expense ratio of 2.37%, according to Morningstar analysis, which is generally higher than its peers.
