Knowing Well What You Own
Neuberger Berman Genesis Fund
Author: Ticker Magazine
Last Update: Apr 10, 11:05 AM ET
|As small-cap companies go through rapid changes, they do not always have easy access to capital markets. Still, companies with profitable business models and disciplined management can sustain their growth rate with the help of proper capital allocation. Brett Reiner, Associate Portfolio Manager of the Neuberger Berman Genesis Fund, and a team of analysts scour the small-cap universe in search of high-quality businesses with such characteristics.
“We use a research-intensive process that ensures a thorough understanding of not just prospective holdings, but even those that have been in the portfolio for years. The process has been refined so it is repeatable.”
No other pool supply wholesaler would be able to do that; nobody else is big enough. Most of the other players are mom-and-pop operations. Looking out over the next five to ten years, it is hard to imagine a scenario where any competitor could even approach the company’s scale.
It is also worth pointing out that its business is largely Amazon-proof. Pool’s customers often need products the same day, and because they can be bulky and heavy, the products do not lend themselves to shipping.
Q: Are you comfortable with Pool Corporation’s high debt load?
We do not think that Pool has a high debt load relative to its profitability, cash flow, and recurring nature of its business.
Currently at 1.5 times EBITDA, we believe Pool’s debt level is appropriate, and at the lower end of its targeted range of 1.5 to 2.0 times.
Q: How do you construct your portfolio?
Our diligent, bottom-up approach has led to low turnover in the portfolio. Our 10-year turnover is 17% and in terms of beta we are at 0.74 versus the Russell 2000 Index, which is the fund’s primary benchmark.
A hallmark of the fund’s performance is its relative outperformance in down markets. This doesn’t happen by chance. It goes back to our high-quality approach of owning the businesses that we believe should perform better during periods of economic stress.
In terms of parameters, we are limited to a maximum of 5% per stock at market value, or 20% maximum per industry at market value. Currently, only a few positions exceed 2% and our top 10 holdings represent roughly 17% of the portfolio. Sector weights and position sizes are monitored daily so we always have a clear view of both.
We seek to remain fully invested, although the fund keeps a cash position of approximately 2% to provide flexibility and allow us to be opportunistic.
Our sell discipline is typically driven by one of three things: making room for superior investment opportunities, increased concern about fundamentals, and stretched valuation leading to an unfavorable risk reward.
The portfolio typically has 120 to 150 holdings; generally, they have a market cap of less than $2 billion at the time of purchase.
Q: How do you define and manage risk?
We manage risk through a quality-focused investment philosophy and a diligent investment process. This is a highly effective method for not investing in companies with what we believe are outsized risks.
A key way we to mitigate risk is through spending significant time analyzing and thinking about what could go wrong with a company’s business model and financial outlook. As we examine a new name for the portfolio, we closely scrutinize risk factors pertaining to the company’s durability and growth prospects.
The recent financial crisis truly pressure-tested our investment philosophy, including our approach to risk management. Despite the meaningful strain that the economy and many companies faced, particularly small ones, those in our portfolio performed relatively well due to their consistent free cash flow generation and conservative balance sheets.
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