Feb. 8, 2005 -- When portfolio manager Robert Bergson joined the Northern Small-Cap Value Fund (NOSGX) in the summer of 2001, it invested in growing companies and shares viewed as undervalued, but it leaned towards cheap stocks.
Since then, the $479-million fund has moved firmly into the value camp. Bergson, who leads the team that oversees the portfolio, explains that Northern Trust Investments wanted to differentiate Small-Cap Value from similar funds it offered that focused on small companies.
One thing hasn't changed, though: It still uses a computer program to determine which stocks to buy and sell. Bergson is a member of Northern's quantitative management group, and a quantitative approach lead the fund to a return of 22.6% last year, versus a gain of 19.7% for the average small-cap value fund.
Northern Small-Cap Value outpaced its peers over the three years ended in December, but it lagged them over the five years ended that month. The fund returned 17.6% and 13.3%, on average, during those periods. By comparison, its peers rose 14.6% and 15.2%.
In screening potential investments, the fund's program filters out shares priced low compared to a company's book value, earnings, sales and cash flow. Then it considers gross margins, looking for improving levels.
The fund hunts for profitable companies that are generating cash and whose bottom lines are expanding faster than others in their business or industry.
The model is designed to exclude companies whose financial picture is fading, so those carrying a lot of debt relative to their competitors don't make the cut.
Overall, the program is intended to identify stocks that have low multiples because they've been unfairly valued by the market, not because a company is in trouble, Bergson says.
"We have a whole lot of companies that are priced as though they are distressed," he says. "We want to weed out those that really are."
The managers trawl for stocks among companies with market caps of about $50 million to $1.8 billion, and keep 500 to 600 of them in the portfolio. That number provides diversity and insulates the fund if a few investments turn sour, Bergson says. "If one of these blows up, we aren't unduly hurt," he says.
Because they're small, many of the companies the fund owns aren't widely followed by Wall Street analysts or widely held by institutions, Bergson says. That can pay off when big brokerage houses begin tracking and recommending the stocks, he points out.
The fund's No. 1 stock at the end of last year was Corn Products Intl (CPO), which processes corn into syrups used to sweeten soft drinks. The company, which the fund has had a stake in since 2001, owes its rank in the portfolio to its consistent earnings growth, according to Bergson.
Northern Small Cap Value's second-largest holding on Dec. 31 was Amerigroup Corp (AGP), a managed health care company that the fund began buying in the second half of 2004. It features "relatively robust" earnings, Bergson said.
The fund's top holdings at year-end also included steel maker Steel Dynamics (STLD); life and health insurer UICI (UCI); and retailer Neiman-Marcus Group`A` (NMG.A).
When it comes to selling, the fund will eliminate companies if their financial fundamentals start to erode, or their stocks become pricey. The fund's turnover rate typically stands at about 75%, Bergson says.
"We don't want to trade 300% a year, if we can help it, because the cost of trading can have a real corrosive effect on our performance," he says.
Contact Bob Keane with questions or comments at: firstname.lastname@example.org.