Morningstar Advisor - Spring 2007 - 42

Undiscovered Manager Champlain Small Company CIPSX Growth of $10,000K Fund Small Growth $13K 12 11 S&P 500 2004, they cherry-picked a team to take with them, and Champlain hit the ground running. Backed by Brayman’s record at Sentinel and its own category-beating two-year run, Champlain Small Company is one of only four Morningstar Analyst Picks among small-cap growth funds. And Then They Wait This stable of high-quality, intensively researched stocks, none that exceeds 3% of assets, seems a particularly sensible approach in an uncertain economic environment. Brayman also believes it is rife with opportunity: “The market’s pursuit of cyclical businesses has left regular growers at terrific relative values.” Small Caps Rule 05 06 07 Category 1-Year Total Return % Small Growth Morningstar Rating 8.51 1-Year Investor Rtrn %* — Expense Ratio (%) 13.48 Investor Rtrn % Rank Cat 1.41 Stewardship 7 C * Data as of March 31, 2007 Dollar-weighted return that measures how the typical investor in the fund fared. miss the congestion. “I am adamant that external environment is a big advantage. Lots of talented folks would rather be here than in New York or Boston.” Brayman jokes that these “Green Mountain handcuffs” help Champlain hold on to talent like analysts Dan Butler, Van Harissis, and David O’Neal, and trader Deborah Healey. Indeed, “quality of life” is a theme that a visitor to the office is likely to hear often—whether from Brayman talking about a weekend outdoors with his two young sons, Healey contrasting life in Boston with Burlington, or O’Neal describing the color of the sun setting over the lake, as seen from the conference room windows. The view may be distractingly beautiful, but the sparsely decorated office itself suggests discipline, with utilitarian furniture and no artwork other than family photos on desktops and children’s drawings tacked onto bulletin boards. Indeed, discipline is a hallmark of Brayman’s strategy, which produced outstanding results at Sentinel Small Company SAGWX from 1996 to 2004. When Brayman and Champlain Chief Operating Officer Judith O’Connell left Sentinel parent NL Capital Management to strike out on their own in late Trim and casual in khakis, Brayman emphasizes that there is nothing flashy about his approach: The best way to make money, he contends, is to avoid losing it by strictly minimizing business and valuation risk. The team starts with five sectors—health care, consumer names, financials, technology, and industrials—and uses qualitative screens to weed out companies with inherent risks. That means emphasizing health-care companies that don’t rely on government payers (such as equipment manufacturers, as opposed to hospitals) and eschewing consumer goods subject to fashion trends in favor of picks like “budding brand fortress” Del Monte DLM. The best financials, such as small private banks, avoid spread risk, while technology names such as FactSet FDS have low obsolescence risk because they benefit from falling prices. As for industrials, innovative companies with problem-solving products (such as the Jaws of Life made by Idex IEX) are safer bets than highly cyclical names. From those companies that pass these “sector factors,” the team builds a “focus list” of the best prospects—well-managed companies with low debt, stable business models, and sustainable earning. Then they wait, sometimes years, to buy until a company is priced well below fair value by a variety of measures, including discounted cash flow. Morningstar analyst David Kathman says that the team’s labor-intensive process “makes me confident that they know what they are talking about. It doesn’t necessarily help in speculative markets but in the long run, it’s a great strategy.” Indeed, while Sentinel Small Company lagged aggressive funds in the heady markets of 1999 and 2003, its stellar long-term returns under Brayman were earned with remarkably low risk for a small-growth fund. Disciplined and methodical he may be, but Brayman just about bubbles over when talking about his favorite stocks. Recent purchase Del Monte, he exclaims, “is a classic example of why I love small caps! Good management is reinvigorating and restructuring a portfolio of brands with small, easy-to-integrate acquisitions of names like Milk Bone. Brands are a great way to create wealth. Brand loyalty creates stable cash flow.” Asked what makes pet food a particularly good business, Brayman responds, “Do you shop by price per pound for your pets?” Of course not, and nor do the growing number of empty nesters lavishing attention and cash on cats and dogs. Although Del Monte may confront rising ingredient costs, it should have little difficulty raising petfood prices. Brayman contrasts Del Monte to Timberland TBL—a holding footnoted in Champlain’s second-quarter 2006 report with a charmingly straight-forward “m” for “mistake.” The once dependable brand name has been buffeted by fashion whims and is out of the portfolio. FactSet exemplifies the team’s approach to the technology sector. Brayman says that the online service, which aggregates comprehensive financial and economic data for professional money managers, “actually benefits from the rapid deflation of technology because [lower prices make it] easier for people to sign on” and subscribe. Another tech pick, Stratasys SSYS, enjoys a similar advantage: As the prices of its prototype printers drop, more customers will be able to purchase the groundbreaking machines, which can translate design specifications into elaborate three-dimensional models in a few hours. What’s more, Stratasys 42 Morningstar Advisor Spring 2007

Morningstar Advisor - Spring 2007

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