(Original essay from FundAlarm, Jan. 2010, revised August 2023)
Have you ever wondered what it would be like to win The Jackpot? The Big One. The one that pays tens of millions? Mike Fasciano knows, and based on his experience, you might want to steer clear of the opportunity. I’ve followed Mike’s career for 25 years now – ever since the days when I maintained “The List of Funds for Small Investors” for the old Brill/Mutual Funds Interactive site, one of the most prominent and well-respected online communities of mutual fund investors in the 1990s. It was a collection of good no-load funds that an investor with fifty bucks and a bit of discipline could get into. Early on, something called Fasciano Fund (FASCX) became a centerpiece of the “small core” fund grouping. Tiny but mighty, it posted a series of strong, steady performances. The December relaunch of Fasciano’s fund gave me an excuse to call and speak with him at his Chicago office.
I’ll divide the story into four sections.
Act One: Small but Mighty. Fasciano launched his fund in August 1987 with a million dollars raised by friends and family. His plan was to invest in small companies that shared several important characteristics: they were well-managed, they generated substantial free cash flow, and they avoided going deeply into debt. That combination meant that the companies could finance their own growth with their own money – which cuts way back on the silly empire-building that occurs when you’re using someone else’s money — and it decoupled the firms’ fate from the whims of banks and bonds. The fund grew slowly and steadily over its first decade, posting consistently strong returns with consistently below-market risks. By 1997, the fund held a modest $56 million in assets. And then he won the damned lottery.
Act Two: The Perils of Prosperity. Leah Modigliani, strategist at Morgan Stanley, is the co-creator (with her Nobel prize-winning grandfather) of the M-squared metric, which allows for a more accurate assessment of risk-adjusted investment performance. In late 1998, she completed a study of 82 small cap funds. That study, which was picked up by The Wall Street Journal, named Fasciano Fund as the decade’s best small cap fund. Modigliani found that Fasciano Fund produced an average return of 17.6% per year over the previous ten years, compared with 11.2% for the Russell 2000 Index. Even without the risk adjustment, Fasciano outpaced 95% of his peers over the decade. Two months later, Money magazine published “Six Funds You Need Now,” which concluded, “few managers have been more adept at weighing risk and reward than Michael Fasciano.”
All of which opened the floodgates. Mr. Fasciano reports that by mid-1999, he had $450 million under management. And that half of that money then “left as fast as it came.” That rush in and out corresponded with a market increasingly frothy and hostile to conservative investing. Fasciano had friends at Neuberger-Berman, then a storied no-load fund firm and investment advisor founded in the 1930s. It was, he reports, “a place with a wonderful culture and history” where the legendary Roy Neuberger still dropped by from time to time.
In March 2001, he became an employee of Neuberger, and Fasciano Fund became Neuberger-Berman Fasciano. At peak, he was managing about $2 billion in assets. That happy partnership was disrupted by two developments that no one could foresee:
- “Careful” stopped working as well as it had. Fasciano’s discipline led him to companies that did not borrow wildly, did not attract venture capitalists, and did not celebrate debt. The easy availability of money in the 2000s made that discipline (temporarily) irrelevant, and the fund lagged its peers and benchmark. At the same time, it did maintain consistently low levels of risk, which were the hallmark of its first decade.
- Lehman Brothers bought Neuberger. Supported by the same debt-happy culture that affected small cap investing, Lehman acquired Neuberger in 2003, bringing with it sales loads and a trader’s mindset. Funds kept flowing in even as Lehman’s own finances, driven by its earlier embrace of sub-prime mortgages, deteriorated. In 2008, Lehman ordered a new set of expense reductions and ordered a wave of layoffs – 10% of the workforce – across its empire. Despite a top percentile performance in early 2008 and a $1.0 billion portfolio, Mr. Fasciano was “right-sized” with 1500 of his colleagues. By July, rumors were floating that Lehman was in line to be purchased by South Korean investors. By August, NB-Fasciano was merged into NB Genesis amidst rumors that Lehman was trying to sell Neuberger to raise cash. A month later, Lehman itself filed for bankruptcy.
Intervallo. Mr. Fasciano had no doubt about his next steps following his separation from Neuberger Berman. He was going back into the fund business as an independent and back to the discipline of building his fund one position – and one new investor – at a time. He filed registration papers with the SEC for FascianoFunds Small Cap. Then, as the market downturn morphed into a blind panic, decided to stay on the sidelines a bit. In the following year, he “did some things to remind me of life beyond small cap stocks.” He took up the discipline of black-and-white photography and embraced the need to spend a lot of time seeing the different grays that lie between those two poles. He took Italian language immersion training and achieved a B-2 level of proficiency (“Can interact with a degree of fluency and spontaneity that makes regular interaction with native speakers quite possible without strain for either party” – a level I haven’t yet achieved even in English), which was followed by two months spent visiting his family’s native land.
Act Three: Renaissance. On December 22, 2009, Mike returned to the field with the launch of Aston/Fasciano Small Cap (AFASX). He counted on the Aston organization to provide him with essential sales and back-office support so that he could concentrate on the portfolio itself. Aston’s recent acquisition by AMG – the Affiliated Managers Group – buoyed his spirit still further since AMG had a great record of nurturing and supporting its affiliated fund families (think “Third Avenue Value”) and had the financial heft to make important contributions to the funds.
And so he began again, “rebuilding relationships with individual investors” and “sticking with the discipline” of buying the stocks of well-managed, fiscally-responsible companies in pursuit of “consistently good” – if rarely spectacular – results for the folks who had entrusted their investments to him. In some ways, he’s a million miles away from the 1987 start-up with its 20 investors. In some ways, he’s come home again.
The Curtain Falls. Michael Fasciano decided in October 2010 to liquidate the new Aston/Fasciano SmallCap Fund (AFASX). Mike explained it as a matter of simple economics: despite respectable returns in its first three-quarters of operation, Aston was able to attract very little interest in the fund. Under the terms of his operating agreement, Mike had to underwrite half the cost of operating AFASX. Facing a substantial capital outflow and no evidence that assets would be growing quickly, he made the sensible, sad, and painful decision to pull the plug. The fund ends its short life having made a profit for its investors, a continuation of a quarter-century tradition of which Mike is justifiably proud.
Exactly one year after launch, having drawn just over $2 million in assets and burdened by a 15% expense ratio, Aston/Fasciano was liquidated. Since then, Michael has managed Fasciano Associates LLC from his home in lovely Lake Forest, Illinois, and has mostly kept out of the public eye.
Life is, indeed, a work in progress.
