Trump trade war talk, Brexit, rising interest rates, and other rumblings and outbursts are just bumps in the market road that shouldn’t affect portfolio companies in the long term, he says. “We look for companies that can succeed regardless of the macro environment. The volatility these events generate creates buying opportunities.”
IPOs a Key Strategy
The prevalence of initial public offerings in the portfolio are a hallmark of Federated Kaufmann equity strategies. Nearly 60% of current holdings in the fund family’s small-cap vehicle were purchased as initial public offerings, and many of the Federated Kaufmann Fund’s holdings were also originally purchased as IPOs. DeNichilo points out that, unlike their dot-com forebears 20 years ago, today’s IPO companies can have good balance sheets, high recurring revenue, strong franchises and a profitable growth trajectory.
“They’re the most inefficient part of the market today, which creates buying opportunities,” he says. “And because the fund has been active in IPOs for over 30 years, we have a front row seat on every one that comes to market.”
Once the firm buys an IPO for one or more of its funds, it typically holds on for at least a few years. That IPO dedication stems from 82-year-old Hans Utsch, who joined the Kaufmann Fund in 1986.
DeNichilo says the octogenarian remains fully engaged in fund management, and just signed a three-year contract to continue in his portfolio management role. While new investment ideas originate with other team members, Utsch still voices his opinion at meetings and has the final word on what goes into portfolios. “Hans created a pervasive IPO culture here, and that would continue even if he were to leave,” DeNichilo says. “They’re an important part of our entire franchise, and a big part of our funds’ DNA.”
The fund also sets itself apart with a benchmark-agnostic strategy that includes investing across all market capitalizations, and while Morningstar classifies the fund as a mid-cap manager, it invests liberally in smaller companies and has a smattering of larger ones as well. This wide-ranging process has produced solid long-term returns.
From its inception in 1986 through mid-2018, a period covering nearly 32 years, the fund’s A shares delivered a 12.33% annualized return. The fund enjoyed those strong returns despite its above-average expense ratios (1.53% for institutional class shares, 1.98% for A shares and 2.53% for B and C shares).
In addition to its focus on IPOs, the fund colors outside the box on a couple of other fronts as well. Foreign companies are part of its mix too, and while they account for less than 10% of assets now, they’ve gotten bigger allocations in the past.
When the managers aren’t seeing anything they want to buy, they may also have a larger-than-average stake in cash. Recently, that stake was around 15% of assets.