FUND WATCH


Winning With Smaller, Unloved Companies

Stacy Rapacon

The managers of Delafield Fund produce good results in down markets by using a contrarian approach to stock picking.



Often, it's not what a fund owns but rather what it doesn't own that makes or breaks its performance. Consider Delafield Fund (symbol DEFIX). While the fund's year-to-date loss of 4% may not seem like much to brag about, it's nearly nine percentage points better than Standard & Poor's 500-stock index, and it beats Morningstar's mid-cap value index by eight percentage points.

A major reason for Delafield's relative success of late is its light holdings in financial stocks. Vince Sellecchia, who manages the fund alongside Dennis Delafield, says it's hard to get a clear picture of financial companies' balance sheets. "You really don't know what's in a bank's or insurance company's portfolio until after the fact," says Sellecchia.

The fund's worst year was 1998, when it posted an 11% loss while the S&P 500 gained 29%. At the time, stocks of large, fast-growing companies were en vogue, but Delafield's managers stuck to their guns and kept investing in the smaller, unloved companies they prefer. "In markets that are very strong and are running very rapidly, we likely will tend to lag," says Sellecchia.

On the other hand, the managers' contrarian approach tends to win in slow markets. During the bear market of 2000-02, when the index lost 47%, Delafield gained 20%. And, except in 2007, when Delafield trailed the S&P 500 by less than one percentage point, the fund has beaten the index every year since.

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Sellecchia and Delafield build their portfolio with a disciplined value strategy. They screen the universe of more than 2,500 small and midsize companies, looking for those with substantial free cash flow and depressed share prices. They also look for companies with catalysts "that will allow them to do well regardless of what's going on in the environment around them," says Sellecchia. The catalyst could be, for example, a change in management or an acquisition.

Once Delafield and Sellecchia narrow the list to about 300 names, they visit the companies, as well as their suppliers and competitors, and meet with top management. They tour any facilities near company headquarters for an up-close look at operations. Says Sellecchia: "We're really trying to understand what makes the company tick in more detail than what you could get from a phone call."

One executive who has impressed Sellecchia is David Mathieson, who was appointed chief financial officer of RSC Holdings (RRR) at the beginning of the year. Previously, Mathieson was with Brady Corp., another Delafield holding. "When he left, I was surprised because he was very well respected at the company, and we thought very highly of him," says Sellecchia. "So I called him up and tried to understand what it was that he saw at RSC."

Mathieson's account of RSC, which rents out construction and industrial equipment, intrigued Sellecchia. After meeting with the company's chief executive, he recently added it to the Delafield fund even as the stock hovered near its 52-week low.

This kind of approach has enabled Delafield to produce fine long-term results. Over the past ten years through July 31, the fund returned 12.11% annualized, beating the S&P 500 by an average of nine percentage points per year and the Morningstar mid-cap value index by more than four percentage points per year. The fund charges 1.23% annually for expenses and requires a $5,000 minimum initial investment.



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