The team at New Jersey-based HGK Asset Management can’t be accused of lacking the courage of their convictions.
As managing partner and portfolio manager on the $110 million HGK Small Cap Value strategy, Eric Fuhrman doesn’t just have a substantial proportion of his net worth tied to the prospects of the company, but also to his individual investment calls.
‘Since we were founded in 1983, we invested in our own strategies. Half of my discretionary net worth is in the strategy invested alongside our clients, and we invest in other strategies throughout the firm,’ he said. ‘We eat our own cooking.’
Such an alignment of interests means Fuhrman is primed to experience the same pain as his investors if the fund takes a downturn.
But there has been little evidence of that over the past three years, with the portfolio beating the Russell 2000 index. Fuhrman’s relatively high-conviction approach, with 63 stocks held in the fund, has delivered an annualised return of 8.7%, versus 7.3% for the index.
Among the successes has been Oregon-based railroad transportation company Greenbrier, representing 2.5% of the fund, which has gained 64% over the past 12 months. Fuhrman bought the company – which builds, leases, repairs and manages railcars in the Americas, Europe and the Middle East – in 2015, as energy prices were tumbling.
‘Our thought was that the stock was trading down on that because they make service railcars that transport liquids that were exposed to [oil]. The market was also observing a big decrease in orders,’ said Fuhrman.
‘We dug a little deeper, looking at filings, and there were pending regulatory changes... companies were understandably holding back on orders until there was visibility on regulation and we saw that as an opportunity.
‘The market saw oil exposure and weak earnings, but we saw a business where we knew the actual story, and we were able to buy what we saw as a super high quality company for a ridiculously cheap valuation and made money in it,’ said Fuhrman.
The investment is characteristic of the sort of company HGK seeks out for its equity separately managed accounts: high quality businesses that the wider market is shunning.
Between them The team of five portfolio managers and four analysts manage small-,mid- and large-cap strategies as well as an international and overseas portfolio. On the fixed income side, they run core, intermediate and short-duration strategies.
‘The biggest factors are a high and sustained level of cash flow return on investment (ROI), which to us indicates a quality business model; quality management; and staying power,’ said Fuhrman.
‘From a valuation standpoint, we’re looking at companies who meet that level of quality but the market is implying a dire forward ROI, or a significant decline in the future.’
Hunting for those opportunities is not without its potential pitfalls, however.
‘You’ll inevitably find a lot of value traps,’ said Fuhrman (pictured above).
‘It’s our experienced fundamental research leads us out of that and allows us to find companies that are dramatically mispriced in the market for some other reason.
‘That can be headline news about a sector or industry that’s misappropriated for this particular company or that can be a short-term earnings miss that the market has overreacted too.’
Finding the right sort of investment also requires filtering out noise, sometimes from the management of the very company HGK is examining.
‘It can be how persuasive the chief executive or chief financial officer’s strategy is or how persuasive their pitch is... whereas we’re trying to be clinical, cold and calculated at analysing the profitability prospects of the business.
Launched in 1983 by former LF Rothschild peers Jeffrey Harris, Warren Greenhouse and Joseph Kutzel, the firm entered a new era earlier this year with the retirement of Harris, who was the last remaining founder to stay with the firm.
But despite these changes, HGK’s investment process has held firm. ‘The market gets very swayed by emotion, and we sit there with our set of methods that are very repeatable and disciplined,’ said Fuhrman.