Morningstar Magazine - October/November 2017 - 81

Tributary Small Company is now the firm's goto small-cap pick. He likes that the stock-picking
process resembles that of his firm. "It's a
fundamental, rational process, and they are willing
to hold for the long term. [Like Tributary,]
we strive to be relatively sector neutral, and we
are hanging our hat on superior stock selection."
Raising the Profile

While both the strategy's performance and the
sound underlying process merit attention, it didn't
draw much advisor attention for a while.
When Wynegar came on in 1999, under the firm's
predecessor, First Investment Group of First
National Bank, there was only $10 million in the
fund. More than a decade later, assets were still
under $100 million-despite the fact that
the fund's 9.8% annualized return from 2000 to
2010 trounced that of the Russell 2000 (5.6%) and
the small-blend average (7.1%).
At that point, Wynegar says, it was clear the fund
needed a different organizational structure for
better distribution among advisors. "We wanted
an identity in the marketplace that other firms
could get their arms around."
First Investment Group's value-oriented teams
were brought under a new registered investment
advisor, Tributary Capital Management, in
2010. The firm's parent company remains First
National Bank, a wholly owned subsidiary
of First National of Nebraska, but the rebranding
and subsequent push for broader distribution
have helped it grow to $1.7 billion in assets under
management. Of that, $1.2 billion is in the
small-cap strategy, about half of which is in the
mutual fund.

the strategy," he says, "but by tempering new
flows, we should be able to stay open for a while."
Also integral to extending the strategy's successful
record is attracting and retaining a strong
investment team. To that end, the incentive plan
is driven by overall strategy performance
to encourage engagement in the team approach.
In addition, the analysts participate in a
revenue sharing plan put in place over the past
several years.
Performance

Terrien's research led him to Tributary about a year
ago, when he was seeking to replace an
underperforming small-cap fund. "I have a high
comfort level with it," he says. "In the small-cap
space, if you are not careful, you can really lose a
lot of money very quickly in speculative names.
The best label I can put on the fund is 'quality.'
They are high-quality managers with a high-quality
portfolio."
Terrien says that the strategy's long track record
provides ample evidence of its ability to
preserve principal in down markets. "The Russell
2000 was negative in 2007 and 2011, and
this fund was positive." The fund also suffered
a minimal 63-basis-point loss in 2015, when the
benchmark was down 4.4%.

annualized 10-year return through August
handily beats the Russell 2000's 7.4%, and ranks
in the top 10% of the small-blend category.
The fund has no expense advantage, however, and
Morningstar has found that costs are a key
predictor of future success. Its older Institutional
shares-available at a retail-like $1,000 minimum-
have a 1.2% expense ratio, in line with the
small-blend category average. The bulk of assets
are in the newer, cheaper Institutional Plus
FOSBX shares (with a $5 million minimum), where
the 0.99% expense ratio is right at the median for
small-cap institutional funds.
That said, the odds are good that the fund will
continue to be a long-term leader if its
strategy and management team remain in place.
Johnson's own assessment of the strategy's
competitive advantage is a fair one: "First
and foremost, we have the right philosophy in
place. We also have a history of working together
that not all managers have. You can look back
at our performance and see how we've done
in up markets and down markets, good economies
and bad economies. The consistency and
continuity of our team is a plus." K
Laura Lallos is managing editor of Morningstar magazine.

The fund's 4-star Morningstar Rating demonstrates its ability to outperform peers on
a risk-adjusted basis. It also beat its peers and the
Russell 2000 Index over the trailing three-,
five-, 10-, and 15-year periods through August
when evaluated by similar risk-adjusted measures,
such as the Sharpe and Sortino Ratios.

Asset growth can hamper execution, particularly
for a small-cap strategy. Morningstar's
Carlson addresses that concern with another
reason the fund made the Prospects list:
"Management has set a fairly conservative capacity
estimate-it intends to close when total assets
hit $1.5 billion."

The fund is competitive on an absolute-return basis
as well. It sometimes lags in rallies such as
in 2013 and the year to date through August-
both periods when speculative biotech names
soared. But it also landed in the top quintile
of the category in 2016 with a 24.9% return, thanks
to strong stock-picking across the board.

Wynegar expects to institute a soft close
at that mark, while continuing to allow existing
clients to invest. A hard close is a possibility,
however. "Around $3 billion is probably beyond

Over the past decade the fund has captured 91%
of the Russell 2000's upside performance. However,
it has also captured only 84% of the downside,
which balances out in the fund's favor. Its 8.8%

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