Davenport Small Cap Focus (DSCPX): Outperforms the Market

Getty Images

Shares in small companies were already hopping when news of a potential COVID-19 vaccine boosted prices even more. Since bottoming in March 2020, the Russell 2000 Index of small-company stocks is up 100.8% on a total-return basis (price plus dividends), beating the 67.3% rise in the S&P 500 Index from its March low.

Davenport Small Cap Focus (DSCPX, $18.22) did even better, with a 101.6% return.

Managers Chris Pearson and George Smith keep a trim portfolio of 33 small, little-known firms that generate robust cash flow and are run by executives with a proven ability to reinvest the cash wisely. The average market value of holdings in the portfolio is $2.2 billion.

The managers favor firms run by founders or executives with big stakes in their company. The Fahari family, founders of Monarch Casino & Resort (MCRI, which includes Atlantis Casino Resort Spa in Reno, Nevada), own 34% of the company’s stock. When shares plunged 66% in early 2020, Smith and Pearson added to their stake in the casino company at low prices of $13 to $14 a share.

“They have arguably the best balance sheet in the industry,” says Smith.

Shares have nearly quadrupled since then.

Other top holdings in DSCPX include investment firm Cannae Holdings (CNNE) and Evoqua Water Technologies (AQUA), which provides cleanwater services and systems.

Smith and Pearson think of themselves as owners of businesses, not stock pickers. That’s the culture of Davenport & Co., the 157-year-old money management firm behind the fund. They are not restricted by rules on sector exposure or about whether to favor value or growth characteristics. But they keep a keen eye on risk. That’s one reason the fund is light on tech and health care names.

“In the world of small-cap tech and health care, risk rises significantly,” says Smith. “And a big part of our M.O. is to produce good returns with below-average risk.”

Both managers practice what they preach and have significant personal money in the fund.

“We invest alongside our investors and clients,” says Pearson.

That has worked for everyone so far. Over the past five years, Small Cap Focus’s 18.0% annualized return has beaten 99% of its peers (funds that invest in a mix of stocks with growth and value characteristics). That has topped the Russell 2000 and S&P 500, too.