Value-focus powers Brandes U.S. Small Cap Equity Fundís strong performance
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By Dave Paterson  | Wednesday, December 20, 2017


 

Brandes U.S. Small Cap Equity Fund is offered by Bridgehouse Asset Managers and is managed by the Brandes Investment Committee using a fundamentally-driven, bottom-up, value-focused approach based on the classic Graham and Dodd theory of value investing. It’s a U.S.-centric small/mid cap fund that looks to build a diversified portfolio of businesses that are trading well below their estimate of true value, with the potential for capital growth. At the end of November, it held 45 names, with the top 10 making up about 30% of the fund’s assets.

The focus is on companies that are less than $1.5 billion in market capitalization. Given the bottom-up approach, the sector mix is the result of the stock selection process, and it will often look nothing like its benchmark. At the end of November, it was significantly overweight in industrials, and consumer cyclicals, with no utilities, or communications, and little exposure to materials.

Top holdings included Resources Connection Inc. (NASDAQ: RECN), Owens & Minor Inc. (NYSE: OMI), St. Joe Co. (NYSE; JOE), Avnet Inc. (NYSE: AVT), and World Fuel Services Corp. (NYSE: INT).

The team is disciplined in their approach, and will only invest in opportunities that meet their strict valuation criteria. At the end of November, they held nearly 21% in cash. Given the value focus, it’s not surprising that the valuation metrics in the portfolio are extremely attractive, compared with the broader market and its peer group. The fund’s price to book ratio was around half that of the benchmark, providing ample margin of safety.

Performance has been very strong, posting a 5-year average annual compounded rate of return of more than 18.2%, compared with an 15% rise in the Russell 2000. Volatility has been well below the index, and it has done an excellent job protecting capital in down markets, experiencing around half the markets declines over the past five years.

The biggest drawback to the fund is its cost, which is 2.73%, which is well above the category average. Given the significant variance between the portfolio and the benchmark, the fund may also be subject to periods of performance dislocation. A notable example was in 2008 when the fund dropped nearly 50%, lagging the peer group by nearly 2,000 basis points. Still, this can be part of a well-diversified portfolio as a potential return-enhancer.

Brandes U.S. Small Cap Equity Fund
Fund company:
Bridgehouse Asset Managers
Fund type:
U.S. Small Cap Equity
FundGrade™ Rating: B (November)
Style: Small Cap Value
Risk level: Medium High
Load status: Optional
RRSP/RRIF suitability: Good
Manager: Brandes Investment Team
MER: 2.73% (front end units)
Fund code: BIP217 (low load)
Minimum investment: $1,000

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.

 

   
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