Ralph Wanger, semi-retired manager of Columbia Acorn Fund LACAX, searches for smaller stocks he believes have yet to be uncovered by Wall Street. Before investing in a company, Wanger looks for companies that are financially strong and have significant growth opportunities ahead of them. These are obvious criteria that most investors look for. However, while many small-cap growth investors are willing to overlook valuation for the upside potential of a stock, Wanger believes that growth should only be purchased at a reasonable price.
Markets often overvalue growth stocks, so this is an important point. On the plus side, however, the small companies Wanger looks for have often largely been ignored by the Wall Street analysts, thus many investors are not aware of potential opportunities. Since fewer investors are paying attention to smaller companies, the chance of finding an undervalued stock is more likely.
Rather than employ a top-down approach to investing, where investors first analyze macroeconomic trends such as GDP growth in a certain country, Wanger employs the ideas of investing according to themes. For example, if Wanger believes the population in China is becoming increasingly wealthy, he may look for consumer-goods makers that sell high-end items in the country.
Wanger isn't afraid to go against the trend either. In the late 1990s, many of his small-growth peers posted huge returns by betting that already high stock prices would be carried higher still by a wave of investor enthusiasm for technology stocks. (This is the so-called "greater fool" strategy.) That tactic, of course, was laden with risk, and many funds paid a huge price.
Amid it all, Wanger did what he always has: He sought out sound businesses with strong earnings and cash flows that appeared cheap. That tactic held Wanger's fund back in 1999, but he was eventually proved correct. From March 2000 through April 30, 2001, the fund gained 16.8% on a cumulative basis, while his typical small-growth peer lost a cumulative 31%. However, Wanger isn't in our Hall of Fame just for a few years of performance. A $10,000 investment in the fund in June 1970 would have grown to just less than $1.3 million if held through May 2003, around the time he stepped down from day-to-day duties. In contrast, the same money invested in the S&P 500 Index would have grown to just more than $400,000.
Bill Ruane >>