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Delaware Small Cap Value Fund
Interview with: Christopher Beck

Author: Ticker Magazine
Last Update: May 03, 8:57 AM ET
Separating winners from losers among myriad companies is never easy in the small-cap universe. Christopher S. Beck, portfolio manager of the Delaware Small Cap Value Fund, and the members of his team combine quantitative and qualitative research to identify companies that have the financial strength and proven capacity to generate steady free cash flow.

ďOne of our fundamental beliefs is that companies that return capital consistently to shareholders in some form should outperform over time. For me, cash flow has always been the most honest way to measure the value of a company.Ē
Q: How do you construct the portfolio? Do you have any maximum position sizes at a sector or an individual holding level?

A: Any company that we buy is probably going to be a major active weight. We try to have pretty solid risk controls, but also recognize that we have to be able to make some big decisions to place our sector and individual allocations.

Our portfolio usually has between 100 and 125 names. When we initiate a position, the typical weighting is 50-60 basis points with the hopes that over time we will get it to 1% or above (depending on the market capitalization and liquidity conditions). We donít want to hold too many stocks at 50-60 basis points because it doesnít offer a lot of potential gain for the portfolio. We will not have any weighting above 5% and have never been close to that. In the past couple of years, we have had a few stocks reach a little over 3%.

For sectors, we will make sure we are plus or minus 10% of the weighting in the Russell 2000 Value Index. I donít think that is overly restrictive, but it does make sure that we have some allocation to every sector.

I am a fan of low turnover. In the last five or six years, we have been in this 20% to 25% turnover rate, which has been lower than I expected and which I donít mind. I just donít know how long we can keep it at this level. It wonít surprise me if it moves up closer to 35% or 40%, which would indicate an average holding period of approximately three years.

Liquidity has been very important for us. Typically, we want to be able to buy or sell in a two-week timeframe. We know there will always be a few stocks that will take longer than weíd like. On balance, though, we want to make sure our portfolio is pretty liquid because often, you need liquidity the most during periods when itís running dry. We try to avoid running that risk.

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