Morningstar Magazine - October/November 2017 - 78

Investors

Consistency and Continuity
Tributary Small Company Fund has
a formula for the long run.

UNDISCOVERED MANAGER

Laura Lallos

features a long-tenured management team plying
a proven approach: It looks for good businesses
trading at a fair price."
A Careful Balance

In every issue, Undiscovered Manager profiles
a manager on the Morningstar Prospects
list compiled by Morningstar Research Services'
manager research group.
What stands out first about Tributary Small
Company Fund FOSCX is its end results.
Screen for a small-cap core fund with strong
relative performance, and this one comes
up near the top time and again. But how it got
there doesn't make for a dramatic story.
There's no maverick manager making heroic
bets against a benchmark here-just careful work
from an experienced team in Omaha, Neb.
That's why the fund has a good chance
of continued success.
Mark Wynegar, who has run the fund since
joining Tributary Capital Management's
predecessor in 1999, and Mike Johnson, who
joined in 2005 and was named comanager
in 2007, are in it for the long haul. Their goal is
above-average long-term performance with
below-average risk. The fund's 4-star Morningstar
Rating as of August indicates their success
relative to other funds in the small-cap blend
Morningstar Category.
The strategy has earned a place in Morningstar
Prospects, a watchlist of up-and-coming
and underfollowed funds maintained by Morningstar Research Services. Senior analyst Greg
Carlson, who oversees the list, says, "Tributary
Small Company was added to Prospects because it

Morningstar October/November 2017

The process behind the performance is a measured
one. Johnson says that while they believe
value stocks are likely to outperform with less risk,
"we are not deep value managers, because
that increases the likelihood of steering yourself
into a value trap."
They look for quality companies that can enhance
shareholder value over time and provide
downside protection in poor economic and market
environments. They seek to buy at discounts
to intrinsic value to generate excess return and
provide a margin of safety. The result is a portfolio
of 60 to 70 stocks bought with the expectation
of a three- to five-year holding period.
"We are active managers," Wynegar says,
"and want all our picks to contribute to
performance, but we want to manage company-specific risk." With this in mind, individual
position sizes are meaningful but never
outsized. On the low end, stakes are generally
above 1%. On the top, while positions can
go up to 5%, they usually remain under 3%.
"We feel that our primary skill set is stock selection,
so we try to isolate market risk," Wynegar says,
"and we don't have sector timing skills, so we stay
fairly similar to the Russell 2000 in terms of
sector allocation." The managers also generally
keep cash under 5% of assets.
Extra Eyes

Picking the right stocks for the portfolio is also
a sensibly diversified process. While Wynegar and

Johnson have ultimate authority over
purchases and sales, Johnson emphasizes that
"this is very much a team-oriented environment."
The managers work with five analysts, all
of whom are responsible for putting up ideas for
the portfolio.
With the exception of Wynegar and a new
analyst who is training as a generalist first, the
team members have specialized coverage
responsibilities. Their sector experience and
ongoing research leads to new ideas.
They also use a multifactor quantitative model
to screen stocks on valuation, profitability, leverage,
earnings revisions, and growth; each stock
is assigned an overall score. The stocks are sorted
into economic sectors for comparison, so
that the analysts can look for the best opportunities within each, in keeping with the fund's
diversified approach.
That's the starting point. When a team member
has a stock to recommend, it undergoes a
preliminary review to be sure that there aren't any
obvious objections that would prevent it from
getting into the portfolio-such as an insurmountable industry concern. Then, the analyst gets
to work and comes back with a full-blown research
report. That's when the whole team digs in.
"We play devil's advocate, poke holes in the
argument, and the analyst finds answers
to our questions. Then, we get back together. The
research process is interactive right from the
beginning," Johnson says. "The more people who
look at [a stock], the better."
Stock Picks

Many of the stocks that make it into the
portfolio tend to stick around. Asked to name
a stock that is emblematic of the approach,
Johnson singles out Littelfuse LFUS-which
predates his own tenure, having been
added to portfolio in 2001. He notes that the
manufacturer of circuit protection products has
benefited from the continued increase of
electronic devices coming onto the market and
from the fact that cars are becoming
increasingly electronic. But Littelfuse is not
only growing with the industry, it is taking
market share.

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