Small Caps Shine

Terry Flanagan

Small cap companies have proven to be dependable sources of equity and fixed income returns during the current cycle, Lamar Villere, portfolio manager at Villere & Co., told Markets Media.

Villere & Co., which manages $3.4 billion, is focused on “finding small, undiscovered companies that are growing faster, growing quickly, and are at a reasonable valuation,” Villere said.

The Villere Balanced Fund has outperformed the S&P 500 by almost a three-to-one ratio since its inception in 1999 by locking in above-average returns during periods of market strength and preserving capital during periods of market weakness. (In 2013, the company launched an equity-only fund, Villere Equity Fund.)

“I think the reason it’s done that is you see a lot of very large cap focused, much diversified funds with hundreds of stocks. That tends to be the type of manager that plays in that space,” said Villere. “We’re focused more on small caps. We’re very concentrated–less than 25 stocks in our portfolio at any given time. We take big bets and really focus on just our best ideas. The fact that we focus on smaller stocks which we believe have and will continue to outperform larger stocks, has enabled us to differentiate ourselves.”

The company is also focused on being tax efficient so it doesn’t trade that frequently. “We tend to hold stocks five plus years,” said Villere. “Any time we’re making any trade, we’re very cognizant of not trying to take any short-term capital gains.”

Villere & Co., a 100-year-old family firm, manages about $2 billion in separate accounts, which have a $1 million minimum. It launched the Villere Balanced Fund as a way to achieve wider distribution.

Because of confidentiality requirements, as long as the company was solely focused on managing separate accounts, it was constrained from advertising its performance. “We’re very focused on confidentiality in our separate accounts,” said Villere. “Nobody knows who our clients are much less what they own and how much money they have in those accounts. As a result of that, nobody ever really saw our performance.”

He continued, “In the early years, it was people who knew us, came to us, and we said, ‘Here’s how we can invest,’” said Villere. “It’s since grown into a thing where it’s a mutual fund on multiple banks’ platforms.”

The mutual fund also serves to attract investors to separate accounts. As a result of having a balanced fund, “anybody can type in a ticker symbol and look it up on Morningstar and say, ‘Okay, these guys seem to do a decent job managing money. Maybe I’ll give them my money,’” said Villere. “Sometimes people come in, and say, ‘I want to put two million dollars in your mutual fund.’ We’ll say, ‘That’s enough that we can put it to work in a separate account and do something different things for you.’”

Villere is looking for the type of company that dominates it’s niche, whatever that niche is. “Ideally a monopoly, but realistically a duopoly,” he said. “We are pretty focused on valuation, so we’re going to miss the company the ones that are just rockets because we’re not going to be willing to pay those prices. Generally we look for some reason that we have a different take on a company.”

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