Fund name
: Satuit Capital Management Small Cap Y (SATSX)Objective: Satuit Small Cap seeks to provide capital appreciation by investing in a diversified portfolio of U.S. small cap stocks. The current parameters for small cap range from $250 million to $2.5 billion; at the lower end of the range, this fund’s investable universe overlaps its sibling, Satuit Microcap, which can invest in stocks with capitalizations up to $500 million. Small Cap can also short stocks. The managers use quant screens of valuation and growth prospects to generate its "Focus List." The managers describe the next step as "qualitative," though many of the factors that the humans consider appear to be quantitative in nature. They conduct a more detailed review of each company's competitive position, its business prospects and financial statements. In addition, they interview management and Wall Street analysts.
Adviser: Satuit Capital Management of Mt. Pleasant, South Carolina. They manage just their two mutual funds.
Managers: Robert Sullivan. Mr. Sullivan, who is the Advisor’s majority owner, has over 25 years of investment experience. Before founding Satuit, Mr. Sullivan was a Portfolio Manager and Senior Equity Analyst at Cadence Capital Management, an institutional manager with $6 billion under management. Sullivan is assisted by Robert Johnson, an analyst who has been with the adviser since 2002, and Jeffrey MacCune, the adviser’s Director of Equity Trading and Operations. The same team manages Satuit Microcap.
Management’s Stake in the Fund: None, I’m sorry to report. It’s not surprising that he has no investment in the Small Cap fund since it’s less than a year old. His decision (as of the October 31, 2006 SAI) not to invest in the Microcap fund is regrettable but appears to be a common practice at Satuit: neither of the other managers, and only two of five board members, had even nominal investments in the Small Cap fund. On the upside, Mr. Sullivan owns Satuit and manages no other accounts or funds.
Opening date: April 12, 2007. It doesn’t appear that the Small Cap fund was available for public purchase at the time of its April reorganization; the prospectus on-file with the SEC suggests that it was available just in November.
Minimum investment: $1,000 for regular and IRA accounts,.
Expense ratio: 1.90% on assets of $5 million.
Comments: By all accounts, launching a new mutual fund is an enormously costly, time-consuming and painstaking task. In addition to the predictable challenges (for example, figuring out why the world needs a new mutual fund and hiring a manager), the fund's advisor has to register the fund with the SEC, then register it with state regulators in every state where they'd like to sell the fund, negotiate distribution arrangements with fund supermarkets, and so on. The cost can run into the hundreds of thousands of dollars, and new funds are often ignored until they've earned three- or five-year track records. One way around this hassle is to adopt an existing fund; that is, a management company can locate and buy a struggling small fund that has already jumped through all of the regulatory hoops. The advisor can then rename the old fund and put their own management team in place. As long as the old and new funds have the same investment strategy (for example, the board is willing to certify that both funds are domestic small-value offerings), the new fund can skip all of the regulatory hassle.
Satuit Small Cap represents just such a rebranding operation. From early 2003 until April 2007, Robert Sullivan -- Satuit's founder and lead manager -- subadvised something called the World Genomics fund which advised itself as "the world's first and only mutual fund specializing in investing in the dynamic, new genomics industry." It invested in large- and midcap-growth companies such as Charles River Laboratories, Genentech and Amgen. Mr. Sullivan's predecessor had produced really large losses in the fund's early years and, not surprisingly, the fund failed to attract investor interest.
Satuit wanted to add a small cap fund to take advantage of investment opportunities among "alumni" of the microcap fund and other, similarly-sized companies. The simplest path was to get World Genomic's board to agree that the investment strategies for that fund were the same as the strategies for the proposed Satuit Small Cap fund. Which they did. It strikes me as a particularly odd certification, but one that will greatly benefit the fund's shareholders.
Why?
Satuit run a very strong microcap fund (ticker: SATMX). The evidence available suggests that the Satuit team are very competent small company investors. Since inception, Satuit Microcap has outperformed the Russell 2000 index by a margin of 2:1 (18.9% annually since 2000, versus 9.6% for its benchmark). That performance has earned it five stars from Morningstar for the past five years and overall. Unlike some funds, strong performance is achieved with great consistency: it has top decile returns (i.e., returns in the top 10% of its peer group) in four of its first seven years, while trailing its peers on only one occasion. More importantly, it has outperformed other first-rate microcap funds over the past year years:
Satuit Microcap: 22% annually over 5 years.
Brazos Microcap and Oberweis Microcap: 21.7%.
Bridgeway Ultra-Small Company Market (BRSIX): 19.4%
Bridgeway Micro-cap Limited and Managers Fremont Microcap: 15.7%
Bjurman, Barry Micro-cap Growth: 14.8%.
The only microcap fund with a substantially better five year record is the superb, but long-closed, Bridgeway Ultra-Small (BRUSX) fund, which returned 23.4%.
Investors interested in microcaps still have access to SATMX. Althought it added a 5.75% front load in December of 2001, it’s relatively easy to dodge the load through various fund supermarkets. Other investors may want to consider the new Small Cap fund for three reasons:
First, the same management team and management discipline will be applied to Small Cap that have succeeded with Microcap. There is, according to Mr. Sullivan, "absolutely no difference at all" in the investment process for the two funds. There is, so far as I can tell, no reason to suspect that the new fund will be any less successful than the old. The firm’s assets under management are quite modest, Mr. Sullivan had already been running the Genomics fund (which must have been something of a distraction) and the managers are not responsible for other accounts. In the absence of such resource constraints, a fair number of investors – from Artisan on the value side to Baron on the growth side and Bridgeway across the board – have demonstrated that the disciplines successful in one size range can be successfully applied to stocks of greater capitalization.
Second, the new fund has the same expenses but far fewer assets to drag around. While $150 million is not huge for a microcap fund, $5 million is down right nimble for a small cap one.
Third, the new fund’s investors inherit a tremendous tax bonus. The predecessor fund had booked $22 million worth of tax loss carryforwards and since this fund succeeds that one, it also inherits its tax losses. For investors, that means that Small Cap can book $22 million in capital gains before they face even a penny’s worth of taxable distributions. Mr. Sullivan suggests that carryforward won’t be exhausted "for quite some time."
The recent transformation of the Genomics fund into the Small Cap fund also explains why you should ignore Morningstar’s three-star rating for the fund since the genomic, often large cap portfolio that earned those stars no longer exists.
Bottom Line: The Satuit folks follow a very disciplined investment regime and seem not to get blown off-course. That’s translated to strong returns in the microcap realm. With an intact management team and the expertise and research developed in producing those returns, Small Cap looks to be one of the more promising new small cap funds to come along in years.
Fund website: http://www.satuitcapital.com/. There’s limited information about the new fund on the website. For example, most of the site’s text says "the" fund when referring to Satuit Microcap. Follow the "performance" link to get a reasonably-current fund fact sheet.