Barron's - USA (2021-02-08)

32 BARRON’S February 8, 2021

losses from company blowups are greater

than in highly diversified portfolios. Hav-

ing executives with skin in the game makes

that less likely to happen. In fact, the fund

has proven less volatile than its small-blend

category peers and the Russell 2000 in the

past five years, and its worst loss—a drop of

28.5% from Feb. 1 through March 30 in

2020—compares favorably to the average

fund’s 34.3% loss and the Russell 2000’s

32.2% decline.

A typical investment for the fund is

Monarch Casino & Resort(MCRI). “In-

siders own 25% of the company and the

CEO [John Farahi] 10%,” Smith says. “The

Farahi family founded this company, and

it’s the consummate owner-operator situa-

tion. They’ve done an excellent job building

this from the ground up, essentially from a

motor lodge into a billion-dollar enterprise

that we think can grow from here.”

Smith is particularly excited about the

prospects of a casino Monarch acquired in

Black Hawk, Colo., in 2012, which it has

recently renovated and expanded.

Nor is he concerned about Covid-19

killing the business. In fact, during the

panic last March, he bought 200,000

more Monarch shares as the stock’s price

fell to a 2020 low of $14. One reason for

his confidence: The fund’s strategy favors

companies with low debt and strong bal-

ance sheets that can weather market

storms.

“Monarch has arguably the best balance

sheet in the [casino] industry,” he says.

Today Monarch stock trades at $55.

Because the fund has a high-quality tilt,

Smith and Pearson tend to avoid cyclical

sectors like energy and mining, which

depend on rising commodity prices. Yet

they are also leery of overpaying for stocks

in hot sectors. Perhaps the most surpris-

ing aspect of the fund’s strong longer-term

performance is its minuscule 4% weight-

ing in tech stocks and nonexistent health-

care exposure—two sectors that have re-

cently driven the market higher.

In comparison, tech stocks and health-

care stocks make up 15% and 21%, respec-

tively, of the Russell 2000. The small-cap

index did outperform Davenport for the

past 12 months, but its annualized return

still lags behind the fund by more than

two percentage points for the past three

and five years.

“It’s not that we refuse to invest in tech-

nology,” Smith says, pointing out that the

fund recently sold a highly profitable posi-

tion in e-tailerEtsy(ETSY). “We just find

that in the world of smaller-cap technol-

ogy, the business risk is elevated—the risk

of failure, rapid change or obsolescence.

There’s also a growth-at-any price phe-

nomenon in tech that’s occurring [today]

that may start to exhaust itself in the not

too distant future.”

Health care is similar, especially in

small-cap biotech companies dependent on

government approval for new drugs to suc-

ceed, leading to “binary outcomes,” Pear-

son says.

The fund’s largest sector weighting cur-

rently is its 29% position in consumer-dis-

cretionary stocks. Historically, the fund’s

allocation to the sector has been closer to

25%. “We feel good generally about the con-

sumer right now,” Smith says. “If you just

look at pent-up demand, savings, consumer

credit metrics—all of it seems to portend

healthy spending going forward.”

Besides Monarch Casino, the consumer

category also includesOneSpaWorld

Holdings(OSW), a company that operates

spas on cruise ships that has also suffered

Covid lumps. The stock hit a low of $2.50

last March. But Pearson sees it as a safer

way to play a recovery in travel.

OneSpaWorld “doesn’t put up any of the

capital” for having spas on ships, he says.

“They just manage the spas and take a fee

for it, and they have a near-monopoly posi-

tion.” Because it has a capital-light busi-

ness, the company’s balance sheet is strong

enough to face the downturn. The market

agrees: Today its shares trade at $10.

A recovery in travel spending is part of

the team’s thesis about pent-up consumer

demand. “Think about all of those trips to

Vegas that were deferred, trips to New

York, spring breaks, cruises,” Pearson says.

“People are going to be champing at the bit

to get out there” once the pandemic ends.

And this fund will be ready for that

surge when it happens.B

Davenport Small Cap Focus

Total Return

1-Yr 3-Yr 5-Yr

DSCPX 23.6% 14.1% 19.4%

Small Blend Category 21.5 7.4 13.4

Top 10 Holdings

Company / Ticker % of Assets

Cannae Holdings / CNNE 6.4%

Monarch Casino & Resort / MCRI 6.1

Evoqua Water Technologies / AQUA 5.2

Stewart Information Services / STC 4.0

Builders FirstSource / BLDR 4.0

Lamar Advertising / LAMR 3.9

Colfax / CFX 3.8

J&J Snack Foods / JJSF 3.0

NewMarket / NEU 2.9

Switch / SWCH 2.9

Total 42.2%

Note: Holdings as of Dec. 31; Returns through Feb. 1;
three- and five-year returns are annualized.
Sources: Morningstar; Davenport Asset Management

Scoreboard: The Far Side

(Stockscontinuedtoriseinanticipationofpost-Covidgrowth.U.S.stockfunds soared3.18%onreliefand

vaccinehopes.IndiaRegionalFundsrallied6%onafaster-than-expectedrecoveryfrom pandemichighs.

OneWeek Year-to-Date

U.S.STOCKFUNDS 3.18% 5.36%

TOPSECTOR/IndiaRegionFunds 6.32 6.33

BOTTOMSECTOR/GeneralU.S.TreasuryFunds – 1.34 – 3.17

S&P500 2.23 3.08

U.S.BONDFUNDS 0.03 0.06

BloombergBarclaysAGGBond – 0.35 – 0.91

THEWEEK'STOP25

Fund InvestmentObjective OneWeek Year-to-Date

CannabisGrowthI/CANIX Specialty&Misc 18.89% 56.3%

AmericanGroCannabisE/AMREX Specialty&Misc 15.42 41.5

JacobInternetFundInv/JAMFX Science&Tech 15.32 26.9

FootprintsDiscoverVal/DVALX FlexiblePortfolio 14.65 34.1

EmeraldBank&FinanceIns/HSSIX FinancialServices 14.08 18.3

JacobDiscoveryInst/JMIGX Small-CapCore 13.62 28.7

EventideExpoTechI/ETIEX Science&Tech 12.16 16.2

JacobSmallCapGroInst/JSIGX Small-CapGrowth 10.69 25.5

KineticsSO&CRInst/LSHUX GLSm/Mid-Cap 10.56 18.7

FairholmeFairholme/FAIRX FlexiblePortfolio 9.94 10.1

KineticsSCOpptyNL/KSCOX GLSm/Mid-Cap 9.77 16.9

RoumellOppValueInst/RAMSX MixTgtAllMod 9.71 23.8

BridgewayUltra-SmCo/BRUSX Small-CapValue 9.60 23.9

AthenaBhvrlTctclI/ATVIX Multi-CapValue 9.40 23.1

MorgStanIIncI/MSSGX Small-CapGrowth 9.24 42.4

FriessSmallCapGrInst/SCGFX Small-CapGrowth 9.14 24.2

PerkinsDiscovery/PDFDX Small-CapCore 8.92 24.9

KineticsParadigmNL/WWNPX Small-CapGrowth 8.87 15.5

TANAKAGrowthFundR/TGFRX Multi-CapCore 8.87 26.6

DriehausMicroCapGro/DMCRX Small-CapGrowth 8.60 20.1

KineticsInternetNL/WWWFX Science&Tech 8.57 12.1

MorgStanInsightA/CPOAX Multi-CapGrowth 8.51 13.0

AlgerMidCapFcsZ/AFOZX Mid-CapGrowth 8.43 14.1

FranklinStrBDA/FBDIX Health/Biotech 8.43 7.7

OberweisMicro-CapInv/OBMCX Small-CapGrowth 8.40 20.7

THEWEEK'SBOTTOM10

Fund InvestmentObjective OneWeek Year-to-Date

NvgtrSentryMgdVolI/NVXIX EquityMktNeutral – 4.55% – 16.0%

GothamShortStratInst/GSSFX AltLong/ShortEq – 3.37 – 3.5

HussmanInvStratGro/HSGFX AltLong/ShortEq – 3.37 7.3

F/mInvEuroL/SSCIS/BESMX AltLong/ShortEq – 3.27 – 20.9

PIMCOExtendDurInst/PEDIX CorpDebtBBBRtd – 3.17 – 6.9

ATACRotationInstl/ATCIX AbsReturn – 3.15 3.4

GoldBullionStratInv/QGLDX PreciousMetalsEq – 2.80 – 6.2

WasatchHoisUSTrInv/WHOSX GenlUSTreasury – 2.68 – 6.6

GothamHedgedPlusInst/GHPLX AltLong/ShortEq – 2.67 – 4.6

ForesterValueN/FVALX AltLong/ShortEq – 2.18 – 1.5

THELARGEST25

Assets 3-Year* 1-Week YTD

Fund (billions) InvestmentObjective Return Return Return

AmericanFundsGroA/AGTHX $125.2 Large-CapGrowth 18.6% 3.04% 5.0%

FidelityContrafund/FCNTX 110.3 Large-CapGrowth 16.8 2.85 3.2

AmericanFundsEuPcR6/RERGX 89.9 IntlLarge-CapGrowth 9.6 2.70 3.1

AmericanFundsBalA/ABALX 87.7 MixTgtAllGro 8.2 0.92 1.5

AmericanFundsIncA/AMECX 74.9 MixTgtAllMod 5.5 1.01 2.2

AmericanFundsICAA/AIVSX 67.2 Large-CapCore 9.0 2.03 3.1

BlackRockCashInstSLA/ 64.4 InstlMoneyMkt NA NA NA

AmericanFundsWashA/AWSHX 63.0 Large-CapCore 8.6 1.84 2.6

AmericanFundsCIBA/CAIBX 61.9 GlobalEquityIncome 3.7 0.69 1.5

AmericanFundsFInvA/ANCFX 59.6 Large-CapCore 10.1 2.43 3.1

AmericanFundsNPerA/ANWPX 58.9 GlobalLarge-CapGrowth 16.7 2.42 4.3

AmericanFundsCWGIA/CWGIX 56.9 GlobalLarge-CapCore 8.1 1.67 3.4

TRowePriceBCGro/TRBCX 56.0 Large-CapGrowth 19.0 3.70 4.1

MetWestTotalRtnI/MWTIX 53.5 CorePlusBond 6.2 – 0.24 – 0.7

FidelityStrAdvLgCp/FALCX 51.5 Large-CapCore 0 2.51 3.7

FidelitySAUSTotStk/FCTDX 48.2 Multi-CapCore 0 2.76 4.4

FidelityGroCompany/FDGRX 44.7 Multi-CapGrowth 29.5 4.52 7.7

DoubleLineTotRtnI/DBLTX 44.2 USMortgage 4.3 – 0.15 0.2

FidelityStrAdvCreInc/FPCIX 41.9 GeneralBond 6.1 – 0.22 – 0.8

FidelityBlueChipGr/FBGRX 41.3 Large-CapGrowth 29.7 4.54 7.8

AmericanFundsGroR6/RGAGX 40.5 Large-CapGrowth 18.9 3.02 5.0

FidelitySrsInvGdBd/FSIGX 38.2 CoreBond 6.6 – 0.30 – 0.6

AmericanFundsAMCPA/AMCPX 37.5 Multi-CapCore 13.2 2.76 3.7

PGIMTotRtnBondZ/PDBZX 34.4 CorePlusBond 6.0 – 0.35 – 1.1

TRowePriceCapApp/PRWCX 34.4 MixTgtAllGro 13.0 1.92 0.9

*Annualized02/01/2018to02/04/2021.ThroughThursday. Source:Lipper