Portfolio manager Bill Hench has earned a reputation as a successful investor in small-cap stocks over the years. With his fund, he pursues an investment strategy based on the value approach, thanks to which he has repeatedly managed to outperform his benchmark index, the Russell 2000, in the past.
• Bill Hench looks for bargain stocks with problems among small caps
• Long-term oriented strategy
• Risk minimization through broad diversification
Bill Hench is portfolio manager of the First Eagle Small Cap Opportunity Fund and as such – as the fund name suggests – focuses primarily on small stocks. The fund was initiated in April 2021 when Hench and his team moved to First Eagle and is now worth $1.7 billion, according to MarketWatch. However, the portfolio manager has been pursuing his strategy – the search for special bargains among small caps – since 2002, when he was still at Royce Investment Partners. He can therefore look back on many years of experience – and an equally long success story. According to “MarketWatch”, Hench achieved a return of 296 percent with the Royce US Small Cap Opportunity Fund in the 15 years to March 2021 – and thus exceeded the Russell 2000 benchmark index, which contains the 2,000 smallest US companies of the Russell 3000 weighted by market capitalization .
Hench’s strategy largely corresponds to that of value investing: the portfolio manager does not buy at high prices, but instead looks for undervalued stocks among small stocks. “We’re looking for cheap prices and a reason for them to get back to normal,” Hench told MarketWatch. He focused primarily on companies that have come under pressure due to temporary problems.
Bargain strategy: Expert relies on small companies where something is wrong
For his fund, Hench primarily selects small caps that trade at a low price relative to their book value or sales – a well-known approach. However, Hench then selects those companies where “something is wrong”. “We look for companies that have short-term difficulties, which is normal. Sometimes it’s their mistakes, sometimes it’s the economy,” the stock market professional told “MarketWatch.” For this reason, he is not interested in the price-earnings ratio of companies, as they are either temporarily not profitable or at least not as profitable as they could be.
“It is a strategy that aims to exploit short-term weaknesses in companies that arise in the normal course of business. Nothing grows in a straight line forever. We all learned that in the financial crisis. This process and approach exploits that. When things aren’t going well for otherwise solid companies, we tend to invest in them because we assume they’re doing something that will potentially improve the situation or return it to normal. That’s just all we do.” , Bill Hench summarized his approach to “Advisor Perspectives”. Once the companies have returned to normality and their share prices have reached – in Hench’s opinion – a fair level, the share positions are reduced again. Likewise, the positions will be closed again if the expected improvements do not occur.
Broad investment approach to minimize risk
Since not all companies can actually solve their temporary problems, reducing risks is also an important topic for Hench. In doing so, he relies primarily on a broad spread of the stocks contained in the fund portfolio: There are usually 200 stocks or more in the First Eagle Small Cap Opportunity Fund. “We believe that the best way to manage risk is to spread the bets,” Hench said in an interview with Portfolio Adviser. “No matter how much work you do, no matter how much research you do, no matter how smart you think you are, you’re going to make mistakes. And when you make mistakes in small caps, it’s hard to make them right when they make up a large percentage of yours portfolios,” the fund manager continued. In addition, because of the limited liquidity for small stocks, one only wants and can build up small stock positions at a time, Hench added to the online portal.
Portfolio manager believes in the long-term success of his strategy
According to his own statement, Hench has always done well with his strategy in the past. So far, it has been the case every time that you have done well “when you have been able to buy small caps at very, very cheap prices” – and in his opinion that will be no different in the future, he said Hench told Portfolio Adviser. He was therefore not concerned that small caps have recently underperformed the broad US market represented by the S&P 500. “Can it get any worse? You bet. But the cheaper they are [die Aktien; Anm. d. Red.] “The better your chances are,” he added. In general, it is also the case that small caps have rarely been under pressure for two years in a row.
Editorial team finanzen.net