Small Cap Investors

I've owned the Acorn Fund from the early days of Ralph Wanger's managing the flagship fund, and it's been a fine investment. His shareholder letters were informative, perceptive and witty. At their recent shareholder meeting, Chuck McQuaid, the current portfolio manager, gave an overview of the small cap investment process at Acorn Funds.

Chuck mentioned that Acorn investment managers care about two things at their portfolio companies:

1. Long term strategies
2. How their companies were governed.

Not exactly a long laundry list, but simple and to the point. Since their portfolio turnover is about twenty percent, their average holding period is five years, so long-term means something in their process.

He also mentioned that for every investment, in addition to a full array of quantitative data on relative financial and investment performance, they maintained some softer, but very important indicators.
The one that got our attention was a short list of reasons why they owned every stock. During every portfolio review, if they re-read this list and the investor perceived something had changed, or performance was indicating a shift, he did not say they re-evaluated the investment. He said they simply sold the stock.
There's an asymmetry in the investment process for fundamental investors. Their research, due diligence and monitoring periods before buying are often quite long. Their performance requirements, required rates of return, and other reasons for owning (management credibility, for example) are usually very explicit. Once things change, the period before the sell decision is usually very short. Company managements often fail to understand this asymmetry and find it frustrating.
All the more reason to make sure that communications reflect a consistent message, and that performance and incentives are always aligned with the message that you send to shareholders.