Financial Stability with Higher Probability of Success
Columbia Small Cap Value Fund I
Author: Ticker Magazine
Last Update: Apr 19, 11:24 AM ET
|Smaller companies do not always enjoy access to capital markets, suffering at times from lack of interest from investors, and all too often their disapproval. Even small caps with strong cash flows, solid balance sheets, and serious growth potential may be out of favor if investors are not satisfied with the generated rate of returns. Jeremy Javidi, portfolio manager of the Columbia Small Cap Value Fund I, focuses on exploiting this oversight by building a portfolio of companies with such characteristics.
“We look for companies with strong balance sheets but low ROEs because they are often discounted in the market. Our fundamental analysis helps us understand how their excess equity could be employed for our clients’ benefit.”
Q: How do you define and manage risk?
Risk is a statistical term. In terms of portfolio management, the greatest risk is a permanent loss of capital, and we believe our philosophy minimizes the potential of this.
Correlations and concentrations can also contribute risk. In 2012, we had one significant concentration: all the names in the portfolio were consistent with our philosophy, which underperformed. However, we now understand how to diversify better in the future.
How names interact with each other is another risk consideration. A “what if” tool allows us to propose scenarios to see how the overall composition of risk in the portfolio changes as we enter names into it.
We have managed through two market cycles since we took over the strategy in 2002, and every single cycle presents another opportunity to learn.
For instance, in 2003, the benchmark dropped something like 50% that year, and that was coming off an already low level. We decomposed what hurt us; that year it was not our philosophy, but low-price risk. There had been such a sell-off in 2001-2002 that a number of names meeting our criteria were trading at $1 to $10, and most asset managers shy away from such low prices.
We learned from that, and used our new understanding to adjust the portfolio to make sure it would not have that risk moving forward.
In the years to come, we will identify further areas to evolve and enhance the strategy. It is only through truly understanding the portfolio and its risks that we can improve the process. Although we will probably continue to make mistakes, we will work hard to not make the same one twice.
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