Undiscovered Managers Value Hound By John Coumarianos Running two small funds in North Carolina, Steven Scruggs knows how to find promising, out-of-the way firms at bargain prices. When Steven Scruggs was in the market to buy a boat engine a few years ago, he found a bargain the way the thrifty value manager uncovers a stock. Scruggs discovered that an engine model called the Evinrude Ficht had a bad reputation; models made in the late 1990s didn’t work properly. He also learned that the manufacturer fixed the flaws but continued to market the engine under the same name. The maker made a big mistake. Sales slumped because, although improved, the engine had been permanently tainted with bad publicity. Scruggs found his angle. He searched online and bought the improved version of the engine with the damaged name for a song. That kind of thoughtfulness, tenacity, and nose for a bargain goes into the way Scruggs picks stocks for the two value funds he runs: Queens Road Value QRVLX and Queens Road Small Cap Value QRSVX. Those same characteristics went into his plan to launch the two funds. Starting Small fund first. Scruggs knew that historical studies showed that value investing beats other kinds of investing over the long haul. He also learned that the small-cap value realm is where the greatest disparities between price and value exist. “The asset class with the best historical returns and the highest percentage of firms yielding healthy amounts of free cash flow to the firm relative to price is small-cap value,” Scruggs says. “It’s the most inefficient part of the market.” It’s no accident that he started the small-cap MorningstarAdvisor.com 53http://www.MorningstarAdvisor.com