'THE MEGA-LARGE CAPS HAVE HAD THEIR DAY'
Hoping to build on the success of its family of four mutual funds, Cambridge (Mass.)-based Numeric Investors will soon bring out n/i numeric investors Small Cap Value Fund. The team of quants at Numeric, which manages a total of $4.2 billion in assets, relies on a flood of financial data flowing through its computers to tell it which stocks to buy or sell. BUSINESS WEEK Senior Writer Robert Barker spoke with Numeric Managing Director John Bogle Jr. and Arup Datta, the new fund's lead manager:
Why a small-cap value fund now?
Bogle: It's the only area left in the U.S. market where we're not already exploiting some market inefficiency.
Is it serendipitous that small-cap valuations, relative to big-cap multiples, seem recently to have hit a nadir?
Bogle: There are some statistics that would lead you to believe that. But we don't make calls as to whether small is going to do better than large.
So you're agnostic?
Bogle: We're completely agnostic on that point, although our gut [feeling] is that it's probably not a bad time to be investing in the small-cap part of the marketplace.
Datta: We especially believe that the mega-large-caps might have had their day.
How much money will you run this way?
Bogle: $200 million or $250 million.
How many stocks will the fund hold?
Datta: On average, about 120. We do not do any market or sector timing. We will be mimicking the sector weights of the benchmark we'll run against. For example, the benchmark [the Russell 2000 Value Index] has 25% in financials; we'll also invest around 25% in financials.
Datta: I'd like to differentiate our model from a ''deep-value'' model. We do look at earnings and book [value]...but we believe that for most companies that are going concerns, the book value [or underlying asset values] does not matter. It's the earnings that drive the stock price.... Our value model is willing to pay up for growth and quality.
When you say quality, do you mean the quality of earnings?
Bogle: It means we're looking at the stability of past earnings and the certainty of analysts' forecasts of future earnings.
So, all else being equal, your model prefers a service company to, say, a cyclical?
Why should anyone put money in this new fund?
Bogle: The main reason is our commitment to ensuring the shareholder gets a fair deal by our explicitly saying up front that we will not take on too many assets. We can't overstate the importance of that. The other reason is that we've got a proven value methodology that has been working in our large-cap [fund].
What's your performance goal?
Datta: To beat the benchmark by 2 or 2 1/2 percentage points per year, on average, after fees.