Objective

The fund seeks to provide long-term capital appreciation by investing in a focused portfolio of small cap U.S. stocks.  “Focused” translates to 20-40 stocks.  “Small cap” means comparable to those in the Russell 2000 index, which places it at the higher end of the small cap universe.  They limit individual holdings to 10% of the portfolio (yikes) and single industries to 25%.

Adviser

SouthernSun Asset Management, which is headquartered in Memphis, Tennessee.  The firm specializes in small- to mid-cap equity investing.  It was founded in 1989 by Michael Cook and has about $1.9 billion in assets under management (as of 09/11).  This is SouthernSun’s only mutual fund.

Manager

Michael Cook.  Mr. Cook is SouthernSun’s founder and he has managed this fund since inception.  He manages another $1.4 billion in other pooled and separate accounts.  He’s supported by five analysts.

Management’s Stake in the Fund

Mr. Cook has between $100,000 and $500,000 in the fund (as of December 2010).

Opening date

October 1, 2003.  Before November 2008, it was known as New River Small Cap Fund.

Minimum investment

$1000 for all account types.  The fund is available through a variety of platforms, including Fidelity, Schwab, Scottrade and TD Ameritrade.

Expense ratio

1.31% on assets of $388 million (as of July 2023).

Comments

SouthernSun has been recognized as the top-performing small cap value fund by both Morningstar and The Wall Street Journal.  In the 2010 Annual Report, the advisor was “pleased to report the Fund was ranked NUMBER ONE based on total return for the trailing twelve month period ending September 30, 2010 in Lipper’s Small Cap Value category out of 252 funds.”  That honor is dimmed only slightly by the fact that the fund’s portfolio is neither small cap nor value.

It is durn fine.  It’s just not small-value.

The advisor specializes in small and “SMID cap” strategies, and SSSFX has migrated slowly but steadily out of the pure small cap realm.  As of the last portfolio report, 60% of assets were invested in mid-cap stocks and the fund’s average market cap is $2.5 billion, substantially above its benchmark’s $800 million.  Likewise, the portfolio sports – by Morningstar’s calculation –  23% in growth stocks against 37% in value.  In the end, the current portfolio averages out to a sort of SMID-cap core.

That structure makes comparisons to the fund’s nominal peer group problematic.  SSSFX’s returns place it in the top 1-2% of all small-value funds, depending on the time period you track.

Even allowing for that difficulty, SSSFX is a stand-out fund.  Start with the assumption that its closest peer group would be core or blend funds that sit near the small- to mid-cap border.  Morningstar identifies 75 such funds.  Over the past 12 months (through 9/30/11), SSSFX has the second-highest returns in the group (behind Putnam Equity Spectrum “A” PYSAX).  SSSFX also finishes second on the past three years, trailing only Appleseed (APPLX).  No one in the group has a better five-year record.

What’s the manager doing?  He looks for firms with three characteristics:

Financial strength: generally measured by internally-generated cash flow

Management quality: measured by the presence of transparent, measurable goals that the managers – from the C-level on down – set and meet

Niche dominance: which is a sustainable competitive advantage created by superior products, processes or technologies.

As of September 2011, those criteria tilted the portfolio heavily toward industrial firms but entirely away from energy, communications and real estate.

The manager’s selection process seems slow, deliberate and labor intensive.  The 2010 Annual Report notes that they added one position in six months.  In the Barron’s profile, below, Mr. Cook reports sometimes adding one position in an entire year.

There are two concerns worth considering as you look at the fund:

It is highly concentrated, especially for a smaller cap fund.  Only nine of the 75 SMid-cap core funds place a greater fraction of their assets in their top ten holdings than does SouthernSun (47%).   That said, most of those concentrated funds (including Appleseed, FPA Capital FPPTX, Gratio Values GRVLX and Longleaf Partners Small Cap LLSCX) have posted strong risk-adjusted returns.

It is volatile, though not gut-wrenchingly so.   The fund’s five-year standard deviation (a measure of volatility) is 29.  By comparison, FPA Capital is 22, Longleaf is 24, and Vanguard Extended Market Index (WEXMX, which has a similar market cap though far lower concentration) is 27. Morningstar rates is as having above-average risk and Lipper rates it as “low” in capital preservation.  Both services agree, though, that the risk has been well-rewarded: Morningstar gives it “high” returns and Lipper makes it a “Lipper Leader” in the category.

Bottom Line

A strong track record earned in both small- and mid-cap investing, an efficient low-turnover style, reasonable asset base and a portfolio constructed slowly and with great deliberation makes a compelling case for keeping SSSFX on your short-list of flexible, diversifying funds.

Fund website

SouthernSun Funds.  For folks interested in his stock-picking, there was a nice interview with Mr. Cook in Barron’s, May 7, 2011.

Fact Sheet (Download)

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].