It’s a long way from Wall Street to Wayzata, Minn.
And that distance may have helped a tiny mutual fund in the Upper Midwest post big returns last year, when most of their better-connected, and better-known peers from the big cities took it on the chin.
The family-run Perkins Discovery Fund
a micro-cap fund run from a Minneapolis suburb, posted a stellar 22% return during 2018 while the Standard & Poor’s 500 stock index fell 6% and small cap Russell 2000 plunged 12%.
It wasn’t a fluke, either. The fund has outperformed the S&P 500
and the Wilshire U.S. Micro-Cap Index W5KMICRO
by more than two full percentage points apiece, per year, over the past decade.
Assets under management? Roughly $20 million.
The annual fees on such a tiny fund are hefty, at 2.5% of assets. That’s a tough hurdle to jump each year. Overall, the firm manages about $150 million in investments. (It’s also up 8% year to date.)
‘We’re looking for companies that will the beneficiaries of positive change.
So what’s the secret? There may not be one. Perkins, like a small number of peers, ignores the big-name stocks that everyone else follows, and invests only in “micro-caps,” which the managers define as companies valued at less than $1 billion.
Research conducted last year on behalf of the Massachusetts state pension fund found that there were better opportunities among micro-caps than in other areas of the market. And more risk.
Really small company stocks are expensive and time-consuming to research. For the big Wall Street money firms, they simply wouldn’t be worth it.
So such stocks can offer bargains for the diligent. And they may rise even in falling markets if a company is on a tear. The key, say the Perkins brothers, is to look for companies that are about to go through transformative change — whether it’s a turnaround, or a new CEO, or a new sales team, or a new product or market.
“We’re looking for companies that will the beneficiaries of positive change,” says Dick Perkins.
Adds his brother Dan: “You’ve heard of ‘GARP,’ or ‘Growth At A Reasonable Price’? We’re looking for CARP: Change At A Reasonable Price.”
‘Sometimes you have to get a little bit creative to get a return.’
And you won’t find those opportunities by running basic stock screens on your computer, they add. Such screens are backwards looking. To find the winners of tomorrow you have to look forward. “We meet with up to 250 companies a year,” says his brother, Dick.
This approach can lead them to idiosyncratic results. Last year, about two-thirds of the fund ended up in various medical device and technology stocks. They own only about 40 stocks in the fund. Most financial experts would say that is going to make the fund particularly volatile.
“The micro-cap market is very inefficient,” says Dick Perkins. “There are more and more companies at the bottom, and there is more and more to sift through. There is more opportunity.”
Micro-caps — and micro-cap funds — won’t come up on most investors’ radar screens. The sector is considered niche and highly risky. You can’t run a really big micro-cap fund, because the companies are too small, so the major mutual fund companies aren’t that interested in the niche.
But Larry Glazer, a financial adviser at Mayflower Advisors in Boston, Mass., says there is a case to be made for adding niche funds like this to a portfolio. “What last year should teach us is that sometimes you have to get a little bit creative to get a return,” he says. “But know what you own and own it appropriately.”
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