Morningstar Magazine - February/March 2014 - (Page 68)

Undiscovered Managers The appeal of this fund is in line with my thinking that not all experts are from out of town. In this case you have really smart people running money in my backyard. James Olsen Holdings MGAM, and trucking company Saia SAIA, all of which more than doubled last year. "The appeal of this fund is in line with my thinking that not all experts are from out of town," says James Olsen, a financial advisor with Legacy Investment Strategies in Gretna, La. "In this case you have really smart people running money in my backyard." There were some misses, though. The current portfolio sports an overweight to the energy sector. Holdings such as Alon USA Energy ELJ and Midstates Petroleum MPO were among the fund's poorest performers the last year. Energy, though, hasn't always provided a headwind. The fund's stellar 10-year record stems partly from its performance in 2008, when it lost 25%, almost 12 percentage points less than the average peer. That year the managers scooped up energy stocks, pushing exposure to 30% of assets just as the price of oil increased. They then smartly took profits, cutting exposure down to 10%. While the fund has traditionally had overweights to energy, this situation was unique. "It was the biggest sector move we have ever made," Lundgren says. The fund's performance has started to get it noticed. It took in around $350 million last year, more than doubling its size. Unfortunately for shareholders, the increase in assets hasn't been followed by a decrease in fees. At a 1.4% annual expense ratio, the fees are just slightly north of both the category average and the comparison group median. A cut in fees would improve the fund's stature-and avoid the 68 Morningstar February/March 2014 stereotype that bank-run funds are all about collecting fees. Gary Lenhoff Screening for Success "We don't listen much to Wall Street analyst calls," says Gary Lenhoff, who has managed Great Lakes Small Cap Opportunity GLSCX the past three years and has been running money for three decades. (Great Lakes 18000 is a part of Illinois-based Wintrust, Funds which consists of 15 bank subsidiaries.) Instead, he and two analysts use a series of screens 13000 that focus on return on invested capital, balance sheet strength and cash flow. They back up what the computer spits out by meeting with management and talking to 8000 suppliers and competitors of potential portfolio candidates. The team ultimately wants to build a portfolio of 40 to 50 stocks that have market capitalizations between $50 million and $3 billion, low debt, experienced management, good growth prospects, and the potential to post an annualized 30% return the next three years. Over the past year, that strategy has led Lenhoff and team to overweight the fund's financials and energy holdings, while underweighting health care. Lenhoff has largely foregone traditional small-cap financials such as regional banks and real estate investment trusts, which account for roughly 9% of the Russell 2000 Index. The sector exposure derives from niche insurance companies such as FBL Financial Group FFG and Horace Mann Educators HMN, which primarily cater to farmers and teachers, respectively. Lenhoff thinks the firms' specialization gives them an edge on diversified rivals. More importantly, though, he believes Great Lakes Small Cap Opportunity GLSCX $18K 13 Russell 2000 TR USD 01/ 11 Category 1/11 Small Blend 01/ 12 1/12 01/ 13 Expense Ratio (%) 1/13 1.24 Morningstar Rating QQQ 3-Yr Annl Total Rtn (%) 17.47 Minimum Investment $1,000 3-Yr Total Rtn % Rank Cat 22 Data as of Dec. 31, 2013 rising interest rates will allow the firms to generate higher income. The fund's energy holdings tilt more toward service-oriented firms than those whose bottom lines are tied to commodity prices. For example, the fund has held an ongoing position in Dawson Geophysical DWSN for more than two years. Lenhoff says Dawson, which conducts seismic studies on possible drilling sites, could benefit as energy firms reconsider old wells

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2014

Morningstar Magazine - February/March 2014
Contents
Contributors
Letter From the Editor
Preparing for the Next 50 Years
Morningstar Managers of the Year
Fixing the Trust Deficit
Rethinking the Path to Retirement
Trends
Same Old, Same Old
Global Briefs
The Economic Implications of an Older World
Banking on Performance
Is the Affordable Care Act Healing Health Care’s Woes?70
Baxter Has a Positive Prognosis
Leading Fidelity’s Charge for RIAs
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Moving the Goal Post

Morningstar Magazine - February/March 2014