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| > Features > Undiscovered Managers |
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| Steven Scruggs, Queens Road Value |
| by
John Coumarianos
| 08-10-09 |
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When Steven Scruggs was in the market to buy a boat engine a few years ago, he found a bargain the way the thrifty value manager uncovers a stock. Scruggs discovered that an engine model called the Evinrude Ficht had a bad reputation; models made in the late 1990s didn't work properly. He also learned that the manufacturer fixed the flaws but continued to market the engine under the same name. The maker made a big mistake. Sales slumped because, although improved, the engine had been permanently tainted with bad publicity. Scruggs found his angle. He searched online and bought the improved version of the engine with the damaged name for a song.
That kind of thoughtfulness, tenacity, and nose for a bargain goes into the way Scruggs picks stocks for the two value funds he runs: Queens Road Value QRVLX and Queens Road Small Cap Value QRSVX. Those same characteristics went into his plan to launch the two funds.
Starting Small
It's no accident that he started the small-cap fund first. Scruggs knew that historical studies showed that value investing beats other kinds of investing over the long haul. He also learned that the small-cap value realm is where the greatest disparities between price and value exist.
"The asset class with the best historical returns and the highest percentage of firms yielding healthy amounts of free cash flow to the firm relative to price is small-cap value," Scruggs says. "It's the most inefficient part of the market."
Scruggs also scouted out the best practitioners and watched how they picked stocks and ran their portfolios. Investors he admires most, he says, include the managers at the Royce funds, John Rogers of the Ariel funds, and Robert Perkins of the Perkins funds.
Scruggs hatched the small-cap fund in June 2002 and the large-cap fund almost two years after that, while working for Bragg Financial Advisors in Charlotte, N.C. (The funds are named after the street on which the firm was located.) The firm was begun by J. Frank Bragg nearly 40 years ago. The second generation of Braggs--Frank Bragg's three sons, John, Benton, and Phillips--share in the business now. Scruggs, who has known the Bragg brothers since high school, married their sister.
For all their success in the advisory business, the Braggs hadn't thought about getting into the mutual fund business until Scruggs took it upon himself to arrange for all the legal and administrative legwork required for starting a mutual fund. Scruggs knew the fund business was more scalable than the advisory business, which is very labor-intensive. Besides, the Braggs, with Scruggs' help, were already running the large-cap portions of their wealthier clients' portfolios with individual stocks in a style that closely resembles that of Queens Road Value. Starting mutual funds seemed like a natural extension.
"Steve thinks a little bit differently from the Braggs, but that's not necessarily a bad thing, and we were happy to let him run with starting the funds," Benton Bragg says.
The Braggs are proud of Scruggs' success, but they're not surprised. Scruggs works most closely with Benton Bragg, and the two are the interested parties on the funds' boards. Bragg, in particular, was an early believer in Scruggs' process, and he showed his confidence in the fund by putting a large portion of his investable assets into it. Bragg isn't named as a comanager, but he's on the investment committee and serves as Scruggs' sounding board.
Easy to Own
Bragg Financial uses a more style-agnostic or neutral approach to client portfolios, but the Queens Road funds show where Scruggs' and Benton Bragg's hearts lie. "We're value folks by nature," Scruggs says.
Although the funds haven't accumulated a lot of assets, the Braggs should indeed be happy that Scruggs expanded the family business. The small-cap value fund delivered a 66% cumulative return from July 1, 2002 (nearly its inception date) through May 31, 2009. Over that period, the average small-value fund delivered 18%, and the Russell 2000 Value Index returned 16%. Despite a rough stretch in relative performance in 2005 and 2006, the fund has been easy to own. Its longest monthly down streak has been a five-month period in which it dropped 11%. This compares well with the average small-value fund, whose longest down streak was a four-month decline of 14.5%.
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