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Summary The fund invests in small cap stocks with healthy balance sheets and growth opportunities. Aberdeen believes that the relative lack of research and need for deep bottom up research creates meaningful investment opportunities in small cap companies. The fund has fulfilled on its promises over every meaningful time-frame. Active Management. The two words that can start arguments and fist fights between financial advisors, investors and money managers. Ok… maybe not fist fights, but close. While in many circles active management is the way of doing business, amongst many investors active management means unnecessarily high fees and fund managers that can’t beat the benchmarks. After all, why pay fund management fees just to have most of the investments in the benchmark? Why pay 1.5% in fees just to lag the index at the end of the year? The reason is, there are a number of situations where active management typically makes sense, including fixed income and small cap markets, and there are fund managers that can do what they promised. One of those standout funds over the last few years, and over the last 12 months in particular has been the Aberdeen Small Cap Fund (MUTF: GSXAX ) (MUTF: GSCIX ) (MUTF: GSXCX ). The Basics Most investors tend to focus on the major indexes such as the S&P 500 and the Dow Jones, indexes that reflect the largest companies in the United States. Investors often focus on the larger end of the company scale for the perceived reasons of liquidity and lower volatility. Aberdeen believes that by navigating into the small cap end where there’s limited Wall Street analyst coverage, investors can reach more opportunities. Fund Basics: Sponsor: Aberdeen Funds Managers: Multi Manager, Aberdeen North American Equity Team AUM: $319.79 Million across share classes Historical Style : Small Cap Growth Investment Objectives: Seeks long term capital appreciation by investing in small cap equities Number of Holdings: 47 Current Yield: 0%, Annual Distributions Inception Date: 11-02-1998 Fees: A Share : 1.47%, I Share: 1.15% (Net Expenses) Source: Aberdeen Funds The Alpha Two things separate this fund from the competition, both their passive and active competitors. First, why Small Caps? Aberdeen reminds us that large caps tend to receive significantly more coverage than other companies. As per Bloomberg, on average there are 24 analysts per large cap stock, 13 analysts per each mid cap stock, and only 7 analysts per small cap stock. With such amount of extensive research available on these stocks leaves little room to capture opportunities in mispriced stocks. This is unlike small caps, where they believe there is abundant opportunities to exploit market inefficiencies due to the lack of research, through deep fundamental analysis and stock picking. Aberdeen seeks out: Companies with robust balance sheets and good management teams that lay a solid foundation for a sustainable business model. We believe this environment makes it an opportune time to purchase well-run companies with strong performance records that still have the potential for further growth. The first alpha generating strategy, and Aberdeen’s strength is: We use a bottom-up research process, carrying out our own due diligence and never investing without first meeting face to face with the management teams of the companies we plan to hold. We see ourselves as owners instead of buyers of a stock. Our portfolio team of 13 experts dig deep and get to know our companies to the core. Source: Aberdeen Small Cap Fund Factsheet 3rd Quarter 2015 The second alpha generator is to hold and run a concentrated portfolio: We also hold a concentrated portfolio of truly small-cap stocks. This means none of our holdings have a market capitalization of more than $5 billion. Source: Aberdeen Small Cap Fund Factsheet 3rd Quarter 2015 Amongst advisors and clients who invest in actively managed funds, a question that inevitably come up is “How active is the ‘active manager?'” The question that follows is “Are the extra fees I am paying the manager justifying the management or is the fund a closet indexer?” One way to measure this is through the Active Share metric: Active share is a holdings-based measure of active management representing the percentage of a portfolio what differs from a benchmark index. A vehicle with an active share of 0 would hold exactly the same portfolio as the benchmark index, while a vehicle with an active share of 100 would have no holdings in common with the benchmark. Source: Aberdeen Small Cap Fund Q3 Fact Sheet As of 9/30/2015 as per Morningstar Direct, the Aberdeen Small Cap Fund had an Active Share of 95.5%., compared to the Morningstar category average of 83.6%. Having established that this fund is truly ‘active’ and differs from the benchmark, how has it performed? The Numbers Starting with the 1 year numbers, the Aberdeen Small Cap Fund has blown the doors off of most investments, being up 9.5% over the last year on a total return basis. Used in the comparison are the iShares Russel 2000 ETF (NYSEARCA: IWM ), and the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). (click to enlarge) Source: YCharts On a 5 year basis, GSXAX has outperformed the Russel 2000, however slightly trailed the S&P 500. (click to enlarge) Source: YCharts On a 10 year basis, including the major sell-off in 2008, the fund has consistently outperformed both the S&P 500 and the Russell 2000. (click to enlarge) Source: YCharts Here are some more detailed looks at the fund from Morningstar. It gives you a deeper look at the breakdown over various time periods compared to the S&P 500. As far as performance, the fund has carried its weight. Let’s examine some MPT Stats to quantify the active management. (click to enlarge) Source: Morningstar As you can see, over the last 10 years, the fund has taken roughly the same risk (Beta) to the Russell 2000 Total Return Index, and was able to generate positive alpha, a measure of outperformance. Over the last 3 and 5 years, the fund carried a lower beta to the benchmark, and was able to generate fairly significant incremental return. Our Take & Final Thoughts All in all, this is a really solid fund. Morningstar has rated it 4 stars overall, and this fund carries a 5 star rating for the 3 and 5 year periods. The fees are higher than average, and significantly higher than index funds, however this fund has consistently earned the fee and then some. As they say, “Fees are only an issue in the absence of value.” There is plenty of value here. The downsides, this fund is concentrated and you may still lose a significant amount during a major sell off, no different from other small call investments. What you are investing in, is a strategy that performs over a meaningful time frame. The fund is available in 3 share classes, so consult your financial advisor or brokerage firm to see what may be eligible to you, perhaps even on a load waived basis. Scalper1 News
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