Can’t anybody here play this game?
That quote from baseball legend Casey Stengel would apply to the job of a stock-fund manager these days. Under the pressure of an uncertain stock market and banking system—and the Federal Reserve’s relentless interest-rate increases to try to tame inflation—it has been harder than ever for stock-picking fund managers to grind out gains.
A year ago, when managers closed the books at the end of the 2022 first quarter, scores of funds posted healthy gains, and all 10 that topped the list in The Wall Street Journal’s quarterly Winners’ Circle survey of outperforming funds delivered returns north of 20%. Flash forward to today, and the picture is different: The market is down for the 12 months, and of the 1,257 qualifying mutual funds in the survey, only 27 managed to eke out any kind of positive return, and only 10 posted a return north of 3%.
The average performance for the funds was minus 8.3%, trailing the S&P 500 index’s total return of minus 7.7%.
That makes the achievement of the team of managers that oversees Private Capital Management Value fund (VFPIX) all the more impressive. Alone within the Winners’ Circle universe, the fund posted a double-digit gain for the rolling 12 months, rewarding investors with an 11.3% return. And they accomplished this feat without a single energy stock in their portfolio, even as the energy sector of the S&P 500 has been the sole bright light.
“We’re not trying to understand everything that’s happening in the broader market,” including trends in oil prices in response to news from Ukraine or OPEC members, says David Sissman, managing director of research at Private Capital Management LLC in Naples, Fla., and a member of the fund’s management team.
Attempting to forecast trends in interest rates, oil prices and inflation “just is not in our scope of expertise,” he adds. Instead, Mr. Sissman says, “We keep looking for idiosyncratic companies doing their own thing and doing it well.”
To qualify for inclusion in the Winners’ Circle survey, funds must be actively managed U.S.-stock funds with more than $50 million in assets and a record of three years or more, as well as meet a handful of other criteria. The survey excludes index and sector funds, funds that employ leverage strategies and most quantitative funds. The results are calculated by Morningstar Direct.
The Private Capital fund does hold one company that benefits from higher crude-oil prices—Target Hospitality Corp. provides workforce lodging services to the energy industry, among other clients—but for the most part, Private Capital’s portfolio is full of low-profile small businesses that offer what the team views as good fundamentals.
Among them: Harrow Health Inc., an eye-care pharmaceutical company. It’s one of a handful of companies that Mr. Sissman and his colleagues added to the relatively concentrated portfolio last year, and as revenue and profitability climbed, so did its share price, which tripled in the 12 months. “As more seniors get cataract surgery, for instance, more ophthalmologists are looking at Harrow’s compounded pharmaceuticals to improve outcomes,” Mr. Sissman says.
Private Capital Management itself may be just the kind of small, idiosyncratic business in which its portfolio managers like to invest. It evolved from the family office of Florida’s Collier family (the descendants of Barron Gift Collier, a streetcar advertising magnate who became one of the state’s largest private landowners); today, the boutique firm manages some $1 billion in assets, only $52.7 million of which is invested in the mutual fund.
In fact, this quarter’s list of top-performing funds is dominated by smaller funds and the smaller stocks that they invest in. Of the 27 funds that had even modest gains in the 12 months, only four invested in large-cap stocks, while another four were midcap funds. The remaining 19 funds that were on the plus side invested mostly in small or microcap stocks. And two-thirds of those funds were themselves relatively small, with assets of less than $1 billion.
“This world of small companies is where there’s a lot of room for stock pickers to thrive,” says Mr.Sissman. He views the large-cap world as increasingly perilous. “Last year, five giant companies—the parent companies of Google and Facebook, Amazon.com, Apple and Microsoft—accounted for more than 20% of the total market capitalization of the S&P 500.” That has made these companies simply too big to continue to grow, he argues. “The only interesting new market for any one of them is something that one of the others already dominates,” he says.
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Even as these managers and their funds enjoy their moment in the sun, as the volatile stock market disproportionately rewards stability and predictability, it’s important to be aware that just as the market’s mood shifts, so may the lineup of top-performing funds. Former Winners’ Circle winners, including some that rode the technology-stock boom, posted double-digit losses for the most recent rolling 12-month period of the survey, leaving them at the bottom of the heap.
That’s one reason that readers should view this glimpse at current top performers as a way to gain insight into different approaches by fund managers. It isn’t intended as a recommended list: individual risk tolerances and investment objectives vary, and some funds may carry high fees, be closed to new investors or be otherwise unsuitable for a particular investor.
Ms. McGee is a writer in New England.
Appeared in the April 10, 2023, WSJ print edition as ‘A New Roster of Top Stock-Fund Managers’.
The performance data quoted represents past performance. Past performance is no guarantee of future results. Investment return and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost. The performance shown reflects fee waivers / reimbursements in effect, without which performance would have been lower. Total returns are based on net change in NAV with reinvestment of all dividends. Current performance may be lower or higher than the performance data quoted. The returns shown do not reflect a 2% fee applied to shares redeemed within 30 days of purchase. For performance current to the most recent month-end, please call 1-800-763-0337.
Investors should consider the relevant objectives, risks, charges, and expenses of the Fund carefully before investing. The prospectus contains this and other important information about the Private Capital Management Value Fund, and it may be obtained by visiting our website at www.pcmvaluefund.com. Read it carefully before investing.
Fund holdings and/or sector allocations are subject to change.
Shares of the Private Capital Management Value Fund are distributed by Foreside Funds Distributors LLC, not an adviser affiliate.
Mutual Fund investing involves risk and it is possible to lose money by investing in a fund. The Fund frequently maintains a more concentrated portfolio than many diversified funds and its value may fluctuate more widely. The Fund may engage in strategies that are considered risky or invest in stocks of companies that are undervalued which may result in greater volatility and less liquidity. The Fund invests in small-cap and mid-cap companies, which involve additional risks such as limited liquidity and greater volatility. The Fund has a value-oriented approach and is subject to the risk that a security believed to be undervalued does not appreciate as anticipated or experiences a decline in value. The Fund’s Gross Expense Ratio is 1.73%. For more information on the risks associated with the fund, please read the prospectus carefully.
The S&P 500 Index is a market cap weighted index of 500 prominent U.S. publicly traded companies. It is not possible to invest directly in an index.