Ed Sheidlower had been managing big money for years. But something about it was bothering him.
“We had to keep turning away business,” Sheidlower says, “which I’m not fond of.” So, less than two years ago, he and his partner got into the mutual fund business.
Sheidlower and his partner, Dennis Lohouse, founded Bryce Capital Management in 1999, in suburban Rochester, N.Y. The pair had worked together at the then Chase Manhattan, where Lohouse served as chief investment officer and Sheidlower as director of equity research. Prior to 2004, the firm served institutional investors, as well as high-net worth investors in a managed account program. The firms’ success – and client demands – convinced Bryce to start a pair of mutual funds, the value portfolio and the corresponding Bryce Capital Growth Fund.
The Bryce Capital Value Fund got off to a good start, posting a 6.78% return in its first quarter after launching in September 2004. Since then, the fund has posted enviable returns: it hasn’t lost money in any of its six quarters, and is already up 13.16% this year. And Kiplinger’s Personal Finance just named it the top one-year performer in it’s category by a mile; it outperformed the second-place finisher 29.31% to 25.94%.
Despite being fairly new funds on the block, Bryce has an extended record of achievement; the firm has been applying their equal-weighted approach to investing since 1999, when the pair developed it as a way to control risk, ensure diversification and make sure that “if a stock has made a big move, the [fund] is capturing some of the gain on the way up.”
This means the funds are on something of the cutting edge of portfolio management; for the value fund, that means each of the 50 stocks – in a given year, approximately half will drop out of the fund, and be replaced by a new stock pick – will have an approximate 2% weight. The strategy has recently attracted a good deal of notice thanks to several exchange-traded fund products which offer equally-weighted incarnations of the Standard & Poor’s 500 Index and Nasdaq-100 Index. Not only have equally-weighted strategies historically outperformed the market, they also offer reduced volatility and low correlation to market-capitalization-weighted strategies.
“Our beta is lower than one, and the r-squared shows very little correlation” to the overall market,” Sheidlower says.
The equal-weight strategy keeps the Sheildlower on his toes, and forces him to acknowledge his mistakes.
“As a position gets smaller, it’s a red flag to me repeatedly saying it’s underperforming the portfolio, or there’s something wrong with the company,” he says, adding, “the market is always right. We don’t dig our heels in, we don’t say, ‘People aren’t getting this. We’re right and the market’s wrong.’ If we’re wrong, we’re wrong, and I think that’s one of the reasons that we do well as a firm. That’s the big difference between outperforming and underperforming.”
Sheidlower’s fundamental stock-picking strategy produces what initially appears to be an unusual portfolio – the manager dismissively notes that Morningstar categorizes the value fund as a mid-cap growth fund. The fund owns both Gildan Activewear and Guess?, picks that Sheidlower defends, based on when he bought them.
“If I buy a name that is extremely successful and doubles in value, should I just blow it out of the fund because now it looks more fairly valued?”
More recently, Sheidlower noticed defense names popping up on his screens, “and that really dictates for us where we’re going to overweight.” So, on Oct. 5, the fund bought BE Aerospace, set to be the beneficiary of a number of big commercial aircraft orders. Since then, the stock is up more than 150%, and the fund has added to the position.
Sheidlower says what distinguishes his fund from the garden variety value fund because he shies away from “turn-around stories, break-apart value and vulture stories.” Instead, he says, “I’m really trying to buy stocks that are extremely cheap to their growth rate, extremely cheap to their peer group, so it really is a value, as in cheap to the market.”
So far, that’s worked out well.