Five Questions for Philip Tasho
Philip Tasho launched the no-load ABN Amro/TAMRO Small Cap fund in 2000, which turned out to be an opportune time. It was the beginning of a long, successful run for small-company stocks. The Russell 2000 index has returned an annualized 8% over the past five years, but Tasho's fund (symbol ATASX) has done even better, returning 12% annually over that period.
He was already a 20-year investment management veteran when he opened Alexandria, Va.-based TAMRO Capital Partners. The firm also manages a large-company fund under the ABN Amro banner. We sat down recently in New York to talk about the prospects for small-company stocks, which, along with the rest of the market, have come under pressure recently.
KIPLINGER's: Your stock-selection process naturally seeks companies that are attractively valued. But you also invest based on certain themes. What are they?
TASHO: It comes down to three big things: I like to buy the best when they're depressed because the law of averages tells you these companies will come back. The second group of stocks consists of laggards in a particular industry. These are companies that have a good core business but are showing signs of a restructuring. And usually when they bring in new management to right the ship, so to speak, they do quite well. So you have earnings reacceleration and a value expansion story. That is a very powerful theme. And the third group is those companies that focus on new and innovative products and services.
Do these themes tend to point you to particular sectors more often than others? We're pretty well diversified, so we're able to find companies across the spectrum in terms of sectors. Our largest sectors currently are technology and industrials. Technology is more of a near-term opportunity for us. There's a lot of consolidation and restructuring taking place within that space. And if you look at where corporate America will be spending money, the small-cap universe is probably a better area of opportunity. Companies already have PCs and networks, and the larger companies are not as attractive from a new spending standpoint. The smaller-cap segment is more focused on where America is spending money, and that's Internet security -- we're seeing it in the expansion of broadband and the initiatives there -- and e-commerce and homeland security, which is a big area.
You mentioned industrial stocks as well. These are boring companies that have been out of vogue for a long period of time. So you have a company like a Manitowoc, which is the largest builder of industrial cranes. That's important for the commercial construction market. During the downturn we saw earlier in the decade, this company bought out a number of other companies at their low points, which should help it consolidate its niche. As we are seeing a resurgence in the commercial area, they're benefiting quite a bit. Manitowoc has the broadest product line, and it is probably the broadest in terms of global presence also. It was the first to open up a crane construction company in China, so it's able to benefit from the big boom that's going on in Asia. It's also in shipbuilding, mainly in the Great Lakes. And it's in refrigeration equipment. Manitowoc is known for the ice cube cooler machines nationwide in the hospitality industry. But our focus is really on the crane business.
What's an example of a less-boring company you like? Hain Celestial. It's the largest consolidator of organic and health foods and personal care products. It's a growth-through-acquisition story. This company has been buying up all these branded organic products for quite a while. So in addition to Celestial teas, it's one of the largest producers of soy milk in those aseptic packages. It also started to get into personal care products. So if you've ever shopped at Whole Foods Markets, Celestial's brands are there in personal-care products. As the whole organic phase or craze is expanding into traditional super markets, that provides some opportunity. Even Wal-Mart announced it's going to start introducing a line of organic products in its stores. So the whole wellness theme is something else we're seeing in our portfolio. We think it's an important theme. We think there are enormous opportunities for growth. We've owned Celestial now since 2002. It was operationally challenged, but we thought management would figure that out because the company had such a great niche, and it did. So it's now a better operator and is now among our top-ten holdings.
After so many years of strong returns, aren't small-company stocks due for a breather? Small cap, in general, is still attractive. There has been a lot of restructuring in small companies over the years starting in 2000. Small caps didn't do well for a long period, in part because they didn't have access to the capital markets unless they were a dot-com company in the late '90s. So these companies needed to improve their management; they needed to focus on the balance sheet because they couldn't get that access to capital. So we saw a higher quality of management coming in and much better financial management in general. Then you had Sarbanes-Oxley. That put another layer of oversight on all companies, but it hurt smaller companies even more. So we haven't had a big IPO [initial public offering] craze yet, we haven't seen speculative excesses. As a matter of fact we've seen more small companies go private and consolidate than come public. So I just don't believe we're in a period where the fundamentals are going to change for smaller-cap companies relative to large cap.