Tag Archives: wst

Summary The Genesis Fund has stayed true to its investment objective, despite financial information providers having trouble categorizing it. The Genesis Fund has consistently outperformed the Russell 2000 indexes over the longer term. The Genesis Fund has lagged its peers over the last five years. The Genesis Fund is clearly a superior small cap option for those who desire to maintain small cap exposure through a bear market. With a forward price to earnings multiple of 23, the “value” focus of the fund is questionable. Introduction I select funds on behalf of my investment advisory clients in many different defined contribution plans, namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Fund Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most out of this article it is helpful to understand my approach to investing in 401(k)s . I strive to write these articles for the benefit of both the novice 401(k) investor and the professional asset allocator. Please comment if you have a question. I always try to give substantive responses. Neuberger Berman Genesis Fund The Genesis Fund has the following five share classes: 401(k) plan investors are most likely to encounter either the R6 shares or Trust shares. The R6 shares have the lowest expense ratio at .78, while the Trust shares are a bit higher at 1.10. For the sake of this article I will assume the Investor shares – NBGNX, which are no-load shares with a reasonable expense ratio of 1.01. These shares have a low minimum investment of $1,000 and are the most likely class for retail investors considering the fund outside of a 401(k) plan. Fund Style The Genesis Fund’s stated focus is that of high-quality, smaller capitalization (“cap”) company stocks that tend to lean more towards the value camp. Financial information companies have juggled their label of the fund’s investment objective to fit their “little boxes” and “cookie cutter categories”. Investors searching the websites of various information providers and online brokers will find this fund’s category ranging from small cap value to mid cap growth. Even with the median capitalization of its 145 holdings at $3.2 billion, the fund should not be considered a mid cap fund. Here is why … If an investment fund says they are long term investors in smaller capitalized companies that they believe present good values, then this is what should happen if they are successful. They should end up with companies worth $3 to $5 billion that they paid $1 to $2 billion for five to ten years ago. Another way of looking at this is that the fund should have low portfolio turnover and the largest holdings should be strong performers. My analysis reveals that this is what has been happening with the Genesis Fund. I went back to the Genesis Fund’s holding report from July 31, 2012 and compared it with its current holdings. There were a great deal of similar names. The fund’s average annual portfolio turnover of 17% over the last ten years also confirms this. There were several companies held in 2012-often in much smaller amounts-that now make up some of the fund’s top 10 holdings. The following chart reveals six of these that have been strong performers over the last five years: WST data by YCharts These six companies were West Pharmaceutical Services (NYSE: WST ), Zebra Technologies (NASDAQ: ZBRA ), Church & Dwight (NYSE: CHD ), Sensient Technologies (NYSE: SXT ), ICON Public Limited (NASDAQ: ICLR ), and Westinghouse Air Brake Technologies (NYSE: WAB ). If one must categorize the fund, I think small cap blend (or core) or really just plain small cap equity is the best option. The key takeaway for investors here is the assurance that the fund’s management has a strong track record of doing what they say they are going to do. This parallels with the fact that the fund’s lead managers, Judy Vale and Robert D’Alelio, have been at the helm for more than 16 years now. Performance History When it comes to evaluating the performance of the fund versus a benchmark, the Russell 2000 Index and the Russell 2000 Value Index are good options. This is also what Neuberger Berman uses. The fund should not be compared to mid cap indexes or mid cap funds. The following table shows how NBGNX has fared against these indexes: Annualized as of June 30, 2015 3-Year 5-Year 10-Year Inception (9/27/88) Genesis Fund – Investor Shares 15.0% 15.4% 9.2% 12.5% Russell 2000 Index 17.8% 17.1% 8.4% 9.9% Russell 2000 Value Index 15.5% 14.8% 6.9% 10.8% The further the historical horizon is extended, the greater the fund’s outperformance has been. Near term though, it has lagged the index. There are also a fair amount of small cap oriented funds that have handily outperformed NBGNX over the last five years. Using the Barrons Fund Screener , I compared it to other small cap funds with at least $1 billion in assets (the Genesis fund is very large with almost $12 billion in assets). The following chart provides a few examples of the retail shares of other funds that have done better over the last five years: GTSIX Total Return Price data by YCharts The four peer funds in this chart are Invesco Small Cap Growth – Investor shares (MUTF: GTSIX ), Hodges Small Cap – Retail shares (MUTF: HDPSX ), JPMorgan Small Cap Equity – Select shares (MUTF: VSEIX ), and Brown Capital Management Small Company – Investor shares (MUTF: BCSIX ). Note: Durable Under Fire Though It is important for novice investors to understand that most mutual funds are almost always fully invested. They tend to keep a blind eye toward macroeconomic developments and try to outperform in their little corner of the market. If a bear swipes the market they may not die, but they will most certainly be wounded. The Genesis Fund has an impressive history of outperformance during bear markets. The fund (institutional shares) has logged an annualized return of -18.4% in the last six major bear market periods (May to Aug 1998, Mar 2000 to Sep 2001, May to Sep 2002, Jul 2007 to Mar 2009, May to Aug 2010, and May to Sep 2011). This is an outperformance of at least 10% against all of the following related indexes and peer fund benchmarks: Russell 2000 Value -28.4% Russell 2000 -35.7% Small Value -29.1% Small Blend -31.5% Small Growth -38.2% Portfolio Positioning A 401(k) investor who wants exposure to small caps has good reason to choose the Genesis fund over a small cap index fund. However, in plans with multiple, active small cap options, there may be a better fund available. I am not a buy and hold (blindly) investor. When I have enough evidence of an approaching storm-every cycle has at least one-I get out of equity town. My current forecast calls for another two years of sideways action for the U.S. stock market from the levels we are at now. In 401(k) plans I am focused on large cap funds with high dividend yields to traverse this sideways market. I view the small cap fund/index arena as broadly overvalued. The Genesis Fund bears witness to this. Despite professing a value approach, the fund’s forward Price to Earnings (P/E) multiple as of June 30, 2015 was a whopping 23.1! Sorry, but I don’t call that value. The fund’s miniscule .33% dividend yield is also another kick to my idea of what makes up value. I cover several different small cap companies – a few of which I have written about on Seeking Alpha – that trade at substantially lower multiples and have much higher dividend payments. Conclusion The Genesis Fund is a good car to board, but only on the right train. For those who must always own a small cap fund, for whatever reason, the fund is a good option if you want a bit more protection for a potential bear market. For regular market environments, many 401(k) plan participants may likely have another small cap fund option available that has performed better in recent times. In any market environment, the fund is a better option than a small cap index. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to Americans within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.