Kip 25

This Small-Company Stock Fund Finds Gems in Surprising Places

Homestead Small-Company Stock's managers are all personally invested in their fund.

The managers of Homestead Small-Company Stock (HSCSX) work hard to find out-of-favor companies primed for a turnaround. Sometimes, their dogged research takes them to places far from their Arlington, Va., headquarters under less-than-ideal conditions. Prabha Carpenter, who comanages the fund with Mark Ashton and Greg Halter, recalls one unglamorous trip she made to Paducah, Ky., during a violent thunderstorm to visit a computer-services firm. And during a stop in Jackson, Miss., to visit a family-owned egg producer, Halter found himself in a sketchy part of town one night. Says Carpenter, “He was texting me emojis to tell me that he was scared to death.”

To find undiscovered companies, the managers have to look under proverbial rocks. It helps, perhaps, that they are personally motivated: Every manager has money invested in the fund, a member of the Kiplinger 25. Ashton, who has been on the job since 1999, has the most—more than $1 million, according to fund filings. “That’s important to us,” says Carpenter. “We want to make money, absolutely.”

The team uses the Russell 2000 index as a guidepost. The index’s holdings recently ranged in value from $177 million to $4.3 billion, so any company in that size range qualifies. And once the managers buy, they tend to hold on for a long time. The $1.2 billion portfolio has a turnover ratio of 5%, which implies an average holding period of 20 years.

Dycom Industries has been a major contributor to the fund’s performance. Shares of Dycom, which provides services and infrastructure to the telecommunications industry, soared 142% over the past year and, at last report, accounted for 7.2% of Homestead’s assets. The fund has held the stock since June 2012.

The fund’s investments in regional banks helped, too. National Penn Bancshares, which has branches in Pennsylvania, Maryland and New Jersey, and Cardinal Financial, which operates in the Washington, D.C., area, both had one-year gains of 21%. Says Carpenter: “Smaller banks are more nimble than bigger banks—customers are able to get a loan, small businesses can finance an acquisition—and they know their customers, which is the essence of banking.” They can also be tempting takeover targets. In August, BB&T disclosed plans to buy National Penn for $1.8 billion; National Penn shares soared 17% on the news.

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