FUND WATCH


Extensive Research at New River Small Cap

The managers of this fund will travel across the world to investigate a company before adding it to their holdings.



When it comes to researching a company, the folks at New River Small Cap often go beyond the call of duty. You're as likely to find manager Michael Cook touring a factory in Indonesia or Brazil as you are to catch him at his office in Memphis.

"We spend a lot of time on the ground understanding the way our companies and their competition operate," says Cook, who runs the $55 million fund with co-manager Andrew Taylor.

Although all of New River's 24 holdings are headquartered in the U.S., many do a significant amount of business overseas -- which is how Cook finds himself "traipsing around in factories and plants in the middle of nowhere." Recently, he was headed to tour a facility in Jakarta of a prospective holding. "This is feet-on-the-ground-type work," says Cook. "I'm not just going to the company's headquarters to hear the management team's spiel."

He and Taylor shop for small and mid-size companies, applying the techniques of Warren Buffett and his mentor, legendary value investor Benjamin Graham: They invest in companies that trade for at least a 50% discount to what knowledgeable buyers would pay in an acquisition.

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Cook and Taylor favor companies that dominate a niche, such as Smithfield Foods (symbol SFD), the largest hog producer and pork processor in the world. They also prefer businesses that generate enough cash from operations to finance expansion without having to borrow money.

The fund may have "small cap" in its name, but just over half of the portfolio is made up of mid-size companies. These include AGCO Corp. (AG), a maker of agricultural machinery, and URS Corp. (URS), an engineering and construction firm.

The managers rarely sell a stock. Turnover is 13% -- which implies that the fund holds a stock for nearly eight years, on average -- and several holdings have been in the portfolio for more than a decade. "We'd like to buy and hold forever, but we generally presume and hope we'll achieve that 50% move in three to five years."

Lately, New River's managers have been shopping for bargains in the water and specialty chemical industries, among others. "Even though these sectors have been touted quite a bit, we continue to see opportunity in food, energy and infrastructure," Cook says.

New River has only been around for four years, but Cook and Taylor have been investing in small companies through private accounts since 1990. The fund (NRVSX) has shined over the past year: Its 21% return through September 18 ranks it in the top 2% of funds that invest primarily in small companies selling at bargain stock prices.

Since its October 2003 inception, New River has gained an annualized 16%, an average of one percentage point per year more than the Russell 2000 index. The fund requires a minimum investment of $1,000 and levies annual fees of 1.50%.




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