The Opportunity in Small-Cap Value – ValueWalk Premium

The Opportunity in Small-Cap Value

Bill Hench is head of the small-cap team at First Eagle Investments and portfolio manager of its small-cap strategy. The First Eagle Small Cap Opportunity Fund (FESCX) was established April 27, 2021 and is managed by Bill and his team.

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Prior to joining First Eagle in April 2021, Bill was a portfolio manager of the Small Cap Opportunistic Value strategy at Royce Investment Partners, where he worked for 18 years. Before that, he spent 10 years in the institutional equity business in Boston and New York, most recently with JP Morgan. He began his professional career as a CPA with Coopers and Lybrand. Bill earned a bachelor's degree from Adelphi University.

I spoke with Bill on February 9.

What are the benefits of investing in small-cap stocks?

If you look historically over long periods of time, there are risks to the small-cap market that you don't have with large-cap or mid-cap, like liquidity, financial dangers and depth of management. Historically, investors have been compensated for that risk. That means that you could potentially get more attractive returns than the S&P over time. Also, it’s more of a domestic play than bigger names. You tend not to have as many big, multinational companies in this part of the market. If you were to look at some of the small-cap indexes like the Russell 2000, about 80-plus percent of its revenues in small companies are generated domestically. In my view, it’s a great way to play the U.S.

What is your distinctive approach to small-cap investing? Explain your opportunistic strategy.

In the interest of full disclosure, I was fortunate to work with a pioneer in small-cap investing, Buzz Zaino, who had started this process more than 40 years ago at what was then Lehman Brothers. I worked with him for 18 years at my prior firm. Much of what I learned and how to implement our distinctive approach, as you call it, was through him.

It’s a strategy that seeks to take advantage of short-term weakness in companies that happens in the normal course of business. Nothing grows forever in a straight line. We all learned that in the financial crisis. What this process and approach does is take advantage of that. When things are not going well for otherwise solid companies, we tend to invest in them on the theory that they’re doing something that’s potentially going to make it better or make it get back to normal. That’s simply all that we’re doing.

My experience at my prior firm taught me that if you can catch that change, you may be able to capture most of the improved performance as the company normalizes.

Read the full article here by Robert Huebscher, Advisor Perspectives.

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