The Next Act for Small Caps Geopolitical Winds That Have Buffeted Large Companies May Be the Wind Beneath Small Companies’ Wings
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PORTFOLIO SPOTLIGHT Villere Balanced Fund Lamar Villere TICKER VILLX AssEts $299.6 million PERFORMANCE YTD 1 yr. 3 yr. 5 yr. 10 yr. 12.34% 13.74% 9.15% 5.06% 9.47% As of 9/30/2018. Three, five, and 10-year figures are annualized. Source: Villere & Co. TOP FIVE HOLDINGS Visa, Inc., Pool Corp., STERIS PLC, Euronet Worldwide, The Howard Hughes Corporation. As of 8/31/18. Source: Villere & Co. COntact INFO 866.209.1129 villere.com n Stocks 70.50% n Bonds 18.20% n Cash 11.30% 71As of 8/31/2018. Source: Villere & Co. +18+11+A The Next Act For Small Caps Geopolitical winds that have buffeted large companies may be the wind beneath small companies’ wings. By Marla Brill fTer yeArS of UnderperformIng lArge at the end of September, and why the equity side of the portfolio, company stocks, small companies and mid- which usually has about 25 stocks, is down to 20. “If we’re trim- caps have made a comeback this year. And la- ming winners and can’t find anything we like to replace them, we mar Villere, who co-manages the Villere Bal- will hold cash,” he says. anced fund, thinks the stage is set for these This year’s performance boost for small caps has been fueled smaller names to assume a market leadership by a number of factors. Unlike huge multinationals, smaller Aposition in the years to come. companies typically derive most of their revenue from sales rising interest rates are pushing the shift. “Investors would in the U.S., where the economy has been expanding at a more logically be less inclined to stay in large-cap dividend payers rapid clip than in some other parts of the world. Investors also when interest rates on Treasury securities are more attractive,” anticipate that small companies will see more benefit from tax says Villere, whose firm specializes in small and mid-cap stocks. cuts because they pay much higher taxes than most large-cap “The tailwind of low interest rates won’t be there for them.” He companies. And the trade tensions that spooked large company adds that even though smaller stocks have advanced this year, stocks left small company stocks relatively unscathed, since their valuations are still more attractive than large caps’ are. their businesses have less overseas exposure. Still, he admits, “we’re having a tougher time finding interest- While all those factors are still in play, small company stocks ing valuations.” The challenging environment is one reason that are often less predictable than their large-cap brethren, and the the fund’s cash stake stood at a higher-than-normal 15% of assets earnings surprises from tax cuts many people are looking for PHOTOGRAPHY BY ZACK SMITH NOVEMBER 2018 | FINANCIAL ADVISOR MAGAZINE may fail to materialize. The competition from large caps hasn’t entirely receded, “Some financial advisors use the fund as a core either. In a pattern that has been repeat- ed several times this year, large company holding and buy other investments for large-cap stocks fell soon after new U.S. tariffs were exposure. I’ve also heard it used as a way to announced (or after other countries im- potentially get small-cap exposure with less posed their own retaliatory tariffs). But volatility.” those stocks bounced back quickly after the initial shocks, an indication that in- —Lamar Villere vestors appear willing to shrug off trade tensions fairly quickly and move back to The bond side of the portfolio usu- with the 35% drop in the russell 2000 their comfort zones. ally ranges from 20% to 50% of assets, Index, a benchmark for small company Villere thinks that eventually investors depending on market conditions. Because stocks. But the Villere fund has also under- will recognize and reward the relative the fund managers anticipate that the performed that index in bull markets. insulation small and midsize companies federal reserve will continue to raise “Some financial advisors use the fund have from trade tensions. “The more trade interest rates, the fund’s bond holdings as a core holding and buy other invest- war rhetoric that gets bounced around, were recently near the low end of the ments for large-cap exposure,” Villere the more investors seem to wave it off,” target range and concentrated in short- says. “I’ve also heard it used as a way to he says. “But eventually trade policy could duration, investment-grade securities. potentially get small cap exposure with have a real impact on large multinationals.” About 10% of the fixed-income side is in less volatility.” below-investment-grade bonds. over certain long periods, the fund’s Balanced Fund On Steroids According to the firm’s website, the returns have exceeded those of more tra- As its names implies, the Villere Bal- mix is “potentially well-suited for inves- ditional balanced funds, but it has fallen anced fund invests in a combination of tors who desire the diversified mix of short in other periods. from its inception stocks and bonds. Unlike most balanced stocks, bonds and cash offered by a bal- in 1999 through August 31, 2018, its 8.23% funds, it focuses mainly on small and mid- anced fund, while having some aggres- annualized return beat the 5.58% return cap stocks in its equity holdings, though a siveness in terms of the underlying equity of the lipper balanced fund index, and it couple of larger companies are sprinkled component.” In many ways, however, this outperformed that bogey over the one- in. The portfolio usually holds 20 to 30 fund defies labeling. one of its managers and 10-year periods as well. However, it stocks, and the typical holding period is has called it “a balanced fund on steroids,” lagged the index over three and five years. at least five years. but it could also be called a small and mid-cap fund with a bond cushion. A Family Affair The fixed-income component is pri- The unusual structure of the fund is Fund Facts marily designed to help temper potential an outgrowth of the new orleans-based Expense Ratio 0.94% downside risk, and it has done that in Villere & Co.’s roots as an investment # Of Equity Holdings 20 down markets. In 2008, for example, the advisor for separately managed accounts. Portfolio Turnover 15% Villere fund’s 28% loss was mild compared founded in 1911 by lamar Villere’s great- Inception Date 9/30/1999 grandfather, the firm now manages some Minimum Investment $2,000 $2.2 billion, mostly in accounts for high- Equity Sector Allocation net-worth individuals and institutions. It Subsequent Investments $500 (% of stock portfolio) Sales Charge None opened the balanced fund in 1999 as a ve- Information Technology 36.0 As of 8/31/18. Source: Villere & Co. hicle for its larger clients to invest smaller Consumer Discretionary 20.8 amounts for IrAs, 401(k) plans and cus- Financials 14.3 todial accounts. “Basically, we wanted Portfolio Facts Industrials 8.3 to create a fund that resembles a typical STOCK PORTFOLIO Health Care 6.6 account at our firm,” he says. “Some fund Weighted Average Mkt Cap $30.1 B Real Estate 5.3 shareholders are also our clients. But there Median Market Cap $5.6 B Manufacturing 4.4 are also a lot of names we don’t know.” Price/Earnings 20.2 Energy 4.3 Villere worked as an investment advi- Consumer Staples 0.0 sor to pension funds in Tennessee and Illi- BOND PORTFOLIO Materials 0.0 nois before joining the family firm in 2013. Average Duration (years) 2.5 Telecommunication Services 0.0 Today, the management team for both As of 6/30/2018. Source: Villere & Co. As of 8/31/18. Source: Villere & Co. the firm and the fund consists of himself, FINANCIAL ADVISOR MAGAZINE | NOVEMBER 2018 WWW.FA-MAG.COM PORTFOLIO SPOTLIGHT his cousins Sandy Villere III and george young, and his uncle Sandy Villere II. “We sometimes talk about business outside the Manager office, but only marginally,” he says. “The Lamar Villere wives wouldn’t like it too much.” (with Sandy Villere II, In the office, the daily discussion about Sandy Villere III, and stocks sometimes involves the hiccups George Young) in a company’s valuations after it misses corporate earnings, endures a manage- Age ment change or runs into some other 43 unique problem. The Villere managers try to discern whether these problems Education are temporary, thus presenting a buying Bachelor’s degree, opportunity, or the long-term problems Washington and of a company to avoid. Lee University; longtime fund holding 2U Inc. joined Master’s degree, the portfolio a few years ago. At the time, Vanderbilt University. analysts were bearish about the online education company’s stock for a variety Professional of reasons, and it had dropped in value Background significantly. “We met with management Investment banker, and went over every problem mentioned HCFP Brenner Securi- to determine what was real and what ties; institutional wasn’t,” Villere says. “We also talked with Equity analyst, clients about their relationship with the Morgan Keegan; firm and they were overwhelmingly posi- investment manager tive.” Villere likes the company’s consis- for pension systems tent revenue stream from 15-year con- in Illinois and tracts with schools around the country Tennessee; joined to offer online graduate degree programs. Villere & Co. in 2013. 2U keeps 60% or more of the tuition. other stocks make their way into the Outside Interests portfolio when positive changes at a com- Spending time pany aren’t being fully recognized by the with four children market.