By Philip van Doorn, MarketWatch
With thousands of actively managed mutual funds to choose from, it’s as difficult to be distinguished from the crowd as it is to beat the broad stock-market indexes. But the Federated Kaufmann Small Cap Fund has done both.
In an interview, John Ettinger, one of the fund’s managers, described the Kaufmann team’s specialty — analyzing and participating in initial public offerings (IPOs), and often holding those positions for long periods. About half of the fund’s 179 stock positions as of Feb. 28 originated when the shares were first offered to the public.
The Kaufmann Funds are part of the Federated Investors group, which includes several fund families. The Kaufmann team is based in New York and manages about $12.4 billion, including $2.4 billion in the Federated Kaufmann Small Cap Fund /zigman2/quotes/204166501/realtime FKASX +2.01% . The fund has trounced the performance of its benchmark, the Russell 2000 Growth Index /zigman2/quotes/210598133/delayed XX:RUO +1.89% , as well as many other indexes and its Morningstar category, as you can see at the bottom of this article.
Specializing in companies that go public
“We evaluate almost every IPO that comes to market,” Ettinger said, which includes meeting with management teams and visiting companies’ facilities. He said the Kaufmann team had an advantage when evaluating “the next generation of great growth companies,” not only because of long experience in this area, but because they “have great relationships with the investment banks.”
Investors often think of IPO shares as hot commodities and worry about missing out if they are unable to participate at the initial offering price. That can cause a large day-one gain for the share price, as we saw when Lyft /zigman2/quotes/208999293/composite LYFT +2.84% went public March 29. The IPO had been priced at $72. The shares rose as high as $88.60 on the first day of trading, before closing at $78.29. The shares on Friday were trading at around $59.
Ettinger said the best investments among IPOs are often those that fly under the radar.
“A lot of times we will make a lot of money in a cold deal,” he said. “We can take down a lot of stock and be more involved in the pricing of that deal. You are not going to get that initial pop on day one, but if we have a million shares and it doubles in two years, we are going to make a lot more money than we would if it popped on day one.”
Examples of long-term IPO investments
“My first IPO recommendation in 1998 is still in the fund,” Ettinger said. That is CoStar Group /zigman2/quotes/208228061/composite CSGP +2.55% , which went public at $9 a share in July 1998 and closed at $478.67 on April 10. Ettinger said the Kaufmann team will often trade around positions after making an initial purchase at IPO. But in the case of CoStar, the Federated Kaufmann Small Cap Fund still holds the block of 100,000 shares it bought when the company went public.
CoStar provides information to commercial real estate brokers, lenders, appraisers and owners in the U.S. and U.K. “They have also become a leader in the multifamily space, selling information and providing tenant leads to landlords who are looking to fill their apartment buildings,” Ettinger said.
The company has a market capitalization of $17.6 billion, which is rather large for a fund with “small cap” in its name. “We don’t sell successful companies,” Ettinger said. “Some of our competitors may have to sell a position based on market cap. We won’t sell a company that is executing just because it has become a mid-cap company. We will hold our winners a long time.”
When asked if he believed CoStar would still be a good investment for someone going in now, he said: “I have held it 20 years and will probably be holding it another 20.”
Another holding of the fund that began at IPO is Americold Realty Trust /zigman2/quotes/202111693/composite COLD +0.36% , which Ettinger described as “the only publicly traded REIT specializing in temperature-controlled warehouses.” The company went public in January 2018 at $16 a share. The stock closed at $31.08 on April 10.
When the Kaufmann team was evaluating Americold, Kaufmann visited one of its warehouses in Atlanta. “This is a very complicated mission-critical business,” he said. “They are the leaders here. They are bringing a lot of technology and automation to an area that historically has had little of it.”