Morningstar - Q4 2020 - 78

Investors

Young Fund, Old Hand
Jim Callinan continues his strong record
at Osterweis.

UNDISCOVERED MANAGER

Laura Lallos

In every issue, Undiscovered Manager profiles
a noteworthy strategy that hasn't yet been
rated by Morningstar Research Services' manager
research group.
When Jim Callinan headed west in 1996, he was
right in time for the region's next big gold
rush. And Callinan was poised to profit from it.
He was coming off a star turn at Putnam
Investments in Boston, where he'd trained as
an analyst before taking over Putnam OTC
Emerging Growth Fund in 1994 and racking up
a short but strong record. (The OTC fund
floundered in later years, and Putnam merged
it into another fund in 2008.) However,
Callinan saw greater career potential with
boutique firm Robertson Stephens, now
RS Investments, which invited him to take over
Robertson Stephens Emerging Growth.
"I joined Robertson Stephens because the firm was
active in the technology space, both in terms
of research and investment banking," he says, "but
at the time it was not clear that San Francisco
would become the center of the dot-com boom."
Callinan made the most of the opportunity,
loading up on unloved Internet stocks in 1997 and
early 1998. It was nice timing, and he then
shifted successfully from consumer-based plays
such as AOL into business-to-business names.
That culminated in the fund posting a benchmarkcrushing 183% return in 1999-stratospheric
even by dot-com-boom standards-and Callinan
being named Morningstar's Domestic Stock

78

Morningstar Q4 2020

Manager of the Year. (The fund is now called
Victory RS Small Cap Growth RSEGX.)
Callinan is still in San Francisco 20 years
later. He and his wife, Letty-they met at Harvard
Business School-raised four children in
the area, and his youngest is at Stanford. Today,
however, Callinan is based at Osterweis
Capital Management.
He is at the helm of Osterweis Emerging
Opportunity OSTGX, which opened in late 2016
shortly after Callinan joined the firm. As of
Sept. 30, it has a three-year Morningstar Rating of
5 stars within the small-cap growth Morningstar
Category. While the fund is not rated by
Morningstar Research Services' fund analysts,
it has earned a Morningstar Quantitative
Rating of Bronze. (The Morningstar Quantitative
Rating is designed to replicate the decisionmaking process used by Morningstar's analysts to
rate funds that aren't on the analyst coverage list.)
While Osterweis Emerging Opportunity has
lived up to Callinan's precedent of running starts,
its strategy is not quite the same one that
Callinan used in his early years at Putnam and
Robertson Stephens. The evolution of his
approach is part of the story of how Callinan came
to Osterweis.
A Refined Strategy

Callinan initially built broadly diversified
portfolios, upward of 100 stocks. That was partly
to help mitigate the risk of investing in upand-coming companies but also to accommodate
burgeoning asset bases.
"When you are in the asset-gathering business,"
he says, "you get jaded because when you have

a lot of money to run, you need to increase the
number of names you invest in. As a consequence,
you lower your knowledge of the companies.
My first goal was to get great alpha from these
positions, and I felt I couldn't do that running
a 100-stock portfolio."
His investment strategy hinges on what he
calls "anchor points"-achievable long-term
growth targets. He offers as an example
his early success with AOL. When Callinan first
invested, the company had fewer than
100,000 subscribers, but CEO Steve Case was
projecting 30 million. Callinan considered the goal
achievable, given AOL's lack of competition.
The stock was expensive in the near term, but
in the long term, what Callinan calls "the
anchor-point earnings potential" justified the price.
Today, Callinan maintains a concentrated portfolio
to strictly focus on companies with solid anchor
points. "There's a finite number of smallgrowth companies that can predict the future of
their business out three to five years," he
says. "You certainly can't get 100 of them. But 30
names aren't that hard to find."
Conversely, identifying anchor points is what
emboldens Callinan to take a concentrated
approach. "The concept allows us to have more
confidence and higher conviction levels," he says.
Callinan initiated this strategy with an institutional
separate account at RS Investments in 2006.
However, a corporate restructuring led to changes
that he feared would compromise his approach.
He left in 2012, and took a limited partnership that
was part of the separate account composite
with him, enabling him to maintain his track record
back to 2006.
"I wanted to have continuity of performance,"
he says, "so I quickly set up my own firm, Callinan
Asset Management." He was open to advances
from larger firms that could provide the support
that would allow him to focus on investing.
But he was also wary of "big asset-gathering firms
like RS and Putnam."
Osterweis, a boutique firm with four other funds,
struck the right balance. "It was a private



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