Morningstar Magazine - October/November 2017 - 80

Investors

Tributary Small Company Fund FOSCX
Growth of $10K

FOSCX

12.58
12.15

14K
$
12

10
Morningstar
US Small Core

09/2014

09/2015

09/2016

Category

Small Blend

Expense Ratio (%)

1.2

Morningstar Rating

QQQQ

5-Yr Annl Total Rtn (%)

12.8

5-Yr Annl Total Rtn % Rank

Source: Morningstar. Data as of 08/31/2017.

strong market share for agricultural and housing
water pumps, and its fuel pump business benefits
from growth in emerging and international markets
transitioning to underground systems. The
company has the fundamental aspects Tributary
seeks, such as a solid balance sheet, and a
wetter-than-average summer a few years ago that
slowed down replacement of agricultural pumps
provided an opportunity to build a position.
American Woodmark AMWD serves as a way
to participate as housing markets perk up,
but it is not as deeply cyclical as homebuilders are.
The maker of kitchen cabinets sees half of sales
stem from purchases of replacement cabinetry via
retailers such as Home Depot HD and Lowe's
LOW. That type of business is a typical fit for the
fund, Johnson says.
While the portfolio is generally sector neutral,
there are industries that are challenging
to invest in given the fund's quality standards.
Wynegar says, "For starters, there is a slice

Morningstar October/November 2017

of the Russell 2000, about 15%, that is companies
that don't make money, and we want freecash-flow generators. Biotech represents about
one third of those nonearners. When biotech does
well, we are at a disadvantage. But in the
long run, [the lack of biotech] adds predictability
and stability to the portfolio. We want a clear idea
of where a company is going to be in the future.
Biotech doesn't fit."
Sticking to Small Caps

Coherent COHR, first added in 2014, provides
an example of the selling process. The team has
been trimming the developer of laser systems and
components because the pick has worked
out very well, with the company's sales, margins,
and earnings exceeding expectations. Valuation
is a key reason for paring a position, but
Coherent's valuation was still reasonable as of
mid-July. However, its market cap has risen from
less than $2 billion at the time of purchase
to more than $6 billion, making it a less appropriate holding for a small-cap strategy. Wynegar

says that such situations prompted the firm
to recently launch a small/midcap strategy,
or "smid-cap," with seed money. (He is comanaging that offering with Don Radtke, who
runs the firm's large-cap strategy and serves
as an analyst here.)
Matthew Terrien of Evanston Advisors in
Schaumburg, Ill., says Tributary Small Company's
adherence to the small-cap space makes it
a good fit for his portfolios: "What appeals to me
is that first and foremost it is true to its style
in terms of market-cap range." Both the fund's
average weighted market cap and weights
in small- and micro-cap stocks are in line with the
Russell 2000. Like that benchmark, it has minimal
mid-cap exposure, less than 5% compared
with a 16% average for the small-blend category
(which includes some funds with a smid-cap bent).
Terrien invests primarily in individual securities
for high net-worth clients but uses mutual funds
for those with smaller accounts. He says that

Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2017