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Small-Cap Value Team
Munder Small-Cap Value Fund
Interview with: R. E. Crosby, J. Hollinshead, J. P. Richardson

Author: Manish Shah
Last Update: , :
Although small-cap stocks are inherently volatile and the sector itself rather inefficient, sector investment returns have historically fared well over time against the major market averages.

Munder Small-Cap Value Fund

Q: Can you share some of your successes in stock picking?

A: Homebuilders have been out of favor with investors. Rising interest rates and the expected slowdown in home mortgage originations have kept the stock valuation of the builders in check. However, one of the better-managed homebuilders, Pulte Homes [NYSE:PHM], met our criteria of earnings growth and profitability. Having initially invested in Pulte in 1999, we continued to build our position during the last three years, despite the market's general skepticism toward its prospects and that of the broader sector. We found the management team to be on the cutting-edge of the industry and we were attracted to its approach in managing the business, particularly with regard to their ability to consistently grow earnings. The returns our investments have generated are rewards for our research and our understanding of the home building sector.

Another example is Newcastle Investment Corp. [NYSE: NCT], which originates and manages commercial mortgage-backed securities. The company is structured as a REIT and its prospects are viewed to be interest rate sensitive, even though the company hedges all its interest rate exposure. The market has a skeptical view of its growth prospects. Here is a company that will grow at 15% this year and next, and has a dividend yield of 8.5%. ROE has been 17% plus. This sector suffered heavy selling in April 2004 and the stock came down significantly. We were comfortable with the financial results of the company and used this period of weakness to add to our holdings. Investing in this company is a credit play, and as the economy recovers, we believe that the stock will benefit.

Q: What risk controls have you put in place?

A: There are a number of risk management protocols in place. We monitor the tracking error to ensure we stay below 7%, and our sector weights are monitored daily and weekly. And, as we are benchmarked to the Russell 2000 Value, we can only go plus or minus 4% to the benchmark sectors, which helps mitigate risk. It's worth noting that we do not underweight a sector more than 4%, even in sectors that we do not like. We are very vigilant about delivering the investment product that our investors have invested in -- a small-cap value fund -- meaning we buy companies below $1.6 billion in capitalization and trim when necessary. As well, we constantly measure weighted capitalization and do not deviate more than 25% plus or minus for the market cap. Further, we spread our investments among 100 stocks so we have a low company-specific risk.

Q: Why do you think you have succeeded where others have found challenges in small-cap sector investing?

A: Our bottom-up approach, strong risk management protocols, and investment returns for doing our research 'homework' give us the confidence necessary to continue in such a volatile sector. Small-cap value may be a 'lonely' sector, but not one without reward. Since there's less competition, there's less information flow and less efficiency being offered to investors. That creates a huge opportunity for proficient teams like ours to offer a very compelling investment vehicle.

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