A mutual fund down 19.5 percent for the year isn't normally cause for much acclaim. But in this economy, that result is enough to land it in the Wall Street Journal's ranks of top performers, as Bragg Financial Advisors of Charlotte learned this month.
The investment firm's Queens Road Small Cap Value fund was the third-best performer in the Small Cap Core category, one of 16 the newspaper tracked in a mutual fund roundup published last week. There were 786 funds in the category overall, said Steve Scruggs, who manages Bragg's two mutual funds.
“We all congratulated Steve on being down 19 percent,” joked company president Benton Bragg.
Of all U.S. equity open-end funds, 99.9 percent had negative returns for 2008 through the end of October, and the average fund had lost 35 percent, according to Morningstar.
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Though Scruggs and Bragg are pleased with their funds' comparatively good performance, they – like anyone with an eye on the market – also realize how strange it is to be near the top of the list with a fund that has lost 19.5 percent of its value year-to-date, and 24.6 percent in the last 12 months.
But when they check the funds and advise – and these days, reassure – their 450 clients, they remember the importance of keeping their eyes on the long term. That's something the Bragg firm has advocated throughout its 40 years in business, they said.
Founder Frank Bragg, Benton's father, still works in the company's office at the corner of Queens Road and Fourth Street just outside uptown Charlotte, and Benton's brothers Phillips and John do, too. Scruggs is Benton's brother-in-law.
As of the end of last year, the company managed $700 million in assets; that's now down to about $600 million because of market declines. The bulk of its business involves hands-on wealth management and investing services. The company started the mutual funds in 2002 to complement that and offer a different vehicle for investing, Benton Bragg said.
The Small Cap fund has about $12 million in assets and is made up of about 60 companies, all under $2 billion in market capitalization. It includes technology, consumer staples and non-financial bank stocks such as insurance. No stock makes up more than 3 percent of the fund. Top holdings include specialty chemical maker American Pacific, energy marketer and distributor UGI Corp. and marketing company Valassis Communications. The fund's sibling, the Queens Road Value Fund, includes larger companies.
Scruggs doesn't make sector bets when choosing stocks for the funds. Instead, he said, the firm's investment philosophy is based on that advocated by famed investor Benjamin Graham, one of Warren Buffett's main influences: Look for companies trading below their intrinsic value, with a strong balance sheet, and wait for them to appreciate.
That involves nuts-and-bolts research such as listening to plenty of company earnings calls to see whether management teams have plans and can demonstrate they're making progress on them, he said. And it requires diligence, discipline and patience.
The approach has served them well in a down market that has exposed foolish risks, Scruggs and Benton Bragg said. But it also bears fruit in a better economy, too. In the past five years, they said, they have outperformed 88 percent of their peers; the Small Cap fund is up 4.6 percent in that time. They'd like to earn 10 to 12 percent annually, the historical average for small-cap stocks.
If you're investing in stocks for the long haul, Scruggs and Bragg noted, you're going to have ups and downs – but in their view, it's better to have higher lows and lower highs. A 20 percent hole is easier to overcome than, say, 35 percent, they said.
“We're never going to hit a home run,” Bragg said. “But if we keep hitting singles and doubles, we'll be OK in the end.”
It also helps, they said, to be a small, private company away from the noise of Wall Street and mutual fund hubs such as Boston.
“We're in a recession and we've had numerous recessions in the last 75 years, and what we always find that they have in common is that they end,” Bragg said. “What the stock market will do is anyone's guess, but we often see in history that the stock market turns up well before the bad headlines end.”