Systematic equity and equity derivative strategies
- Small cap growth
- Mid cap growth
- Covered call: growth and income
- Equity long/short
HOW THE FIRM WAS FOUNDED:
Chief investment officer Michael Borgen (pictured below) launched Sapphire Star Capital in 2015 after almost two decades at Navellier & Associates. He moved to the Seattle area 14 years ago when his wife, who works for Microsoft, transferred to the firm’s headquarters.
He ran portfolios out of a home office for Navellier for a decade before building his own firm in 2015. He named it Sapphire after his wife’s birthstone. Borgen’s former boss Louis Navellier has been supportive of this new venture. ‘Not only did he let me leave, but he also gave me the right to take the track record with me,’ Borgen recalled. ‘He was also the first client of ours – as a subadvisory client. He has been a mentor to me throughout my career, and he has been very supportive.’
Today, Sapphire subadvises the Navellier & Associates’ Small Cap Growth, Mid Cap Growth and Covered Call strategies.
FLAGSHIP FUND OR STRATEGY:
The $53 million Sapphire Star Small Cap strategy, which is available via the $29 million Yorktown Small-Cap fund, holds a concentrated portfolio of 44 holdings. It aims to identify mispriced small-cap stocks and American Depository Receipts that exhibit strong, sustainable and improving fundamentals, including sales and earnings growth over time.
The strategy also focuses on stocks with asymmetrical return profiles. Its largest sector exposures are to health technology (18.51%), finance (13.56%) and electronic technology (12.10%). The top 10 holdings accounted for almost 37% of the portfolio at the end of July.
Sapphire has just one portfolio manager and one research analyst, and the team has a two-stage investment process. In the first stage, a universe of 2,000 small-cap stocks is narrowed down based on a quantitative market factor, which is calculated as alpha divided by standard deviation. At this stage, 75% of the investment universe is eliminated.
The second stage is fundamental in nature, and the team eliminates another 20% of the initial universe by looking at criteria such as earnings growth, sales growth and growth in cash flow. ‘After that, we have a more manageable list of stocks that we can go ahead and run technical analysis on. Then I have more discretion over which stocks to pick out of that pool,’ Borgen said.
When deciding whether to sell a stock, Borgen looks at whether its fundamentals have deteriorated, its reward/risk rankings have dipped or it has amassed excessive risk.
Borgen believes that inefficiencies in the small-cap market give investors opportunities to create alpha. ‘We aim to seize that opportunity and create alpha by applying our systematic approach to the market,’ he said. ‘We use a process that takes the emotions out of investing, and we believe that it’s repeatable.’
ONE THEY GOT RIGHT:
The strategy’s best call has been HR software provider Paycom Software, Borgen said. At the end of July, it accounted for 4.7% of the portfolio.
Borgen first bought Paycom at around $50 a share and has since watched the price almost triple to $140 a share in early October. ‘Quarter after quarter, year after year, it continues to grow its sales and earnings. It is doing exactly what a company is supposed to do,’ he said.
ONE THAT COULD HAVE BEEN BETTER:
Healthcare company MiMedx Group, which designs and manufactures bio-materials, had been doing phenomenally well in the portfolio until February, when it announced that it had to restate its earnings going back six years, causing the stock to fall by 50%.
‘We held on to that stock for too long. We were waiting for the bounce back,’ Borgen said.
The stock rebounded slightly in June, before selling off again. ‘At that point, our system said it was just too volatile and there was no alpha.’
Borgen had first bought the stock at $12 a share and ultimately exited at $4.25. ‘The lesson we learned from that was that as soon as you hear a company has to restate earnings going back several years, it’s an indication that you cannot have confidence in the current leadership, so you should exit the investment,’ he said.