Even when it comes to small-cap stocks, the funds that garner most of the attention are the large ones. Although few people outside of the investing world may have heard of the $933 million Delafield fund of New York, it has quietly been leaving its bigger competitors in the dust .
Helmed by co-managers Dennis Delafield and Vincent Sellecchia, the fund is unhampered by any one style or market cap. Delafield and Sellecchia are free to roam where the bargains are, be they big companies with household name recognition or obscure stocks as little known as the Delafield fund itself.
However, it's in the small- and mid-cap arena where the pair finds themselves most often. It's here where the biggest mispricings of solid companies occur. Delafield and Sellecchia are clearly onto something. For the five years ended Oct. 29, 2010, the fund is up an annualized 8.7% a year, in the mid-cap value category's top 1%. For the past 10 years, the fund is up 12.9% a year, again besting 99% of its category rivals.
Delafield founded his eponymous management firm in 1980, the same year that Sellecchia joined him. The partners managed money for wealthy private clients. They debuted the mutual fund in 1993 to accommodate friends and family of their clients who did not meet the firm's account minimums. New York-based Tocqueville Asset Management acquired Delafield last year.
It's hard to pinpoint exactly how Delafield and Sellecchia find the 66 stocks that populate the fund. However an issue gets on their radar, it must be cheap.
They follow up picks with old-fashioned research, which places importance on face-to-face meetings with management, and conversations with competitors and suppliers. The managers are trying to identify potential catalysts that will cause the stocks to rebound. "We want to find a company that seems to be undervalued, and then understand who they are and why they might change for the better," Delafield explains.
A classic turnaround example is Ferro, a specialty materials and chemicals maker. For years the pair had followed the Cleveland-based outfit, but resisted buying because of the price. The firm began to stumble as investors fled to stocks with more pristine balance sheets. But new CEO James Kirsch made a commitment to improve the company's finances. Today, Ferro has a debt-to-equity ratio of just 0.58, down from 1.79 in 2008. The stock is up 69.9% through Nov. 1.
CAPTAINS OF INDUSTRIALS
Although Delafield and Sellecchia don't make macroeconomic calls, their approach often leads them to the industrial materials sector, where over half of the fund's assets reside. One such holding is Ingersoll-Rand, the big supplier to the transportation, manufacturing, construction and agriculture industries.
The company had made a number of pricey acquisitions, resulting in more leverage than investors wanted to see. When Delafield purchased the equity in June 2009, the firm was moving toward paying down debt.Today, Ingersoll sells for $39, a 26.4% improvement from a year prior.
In addition to Ingersoll Rand, Delafield has a smattering of decidedly large-cap stocks. Some are big companies now, but weren't when they were first purchased, such as Thermo Fischer Scientific, maker of scientific instruments.
Others started large and stayed so, like Tyco. Delafield first became interested in Tyco shortly after the departure of ex-CEO Dennis Kozlowski amid a compensation scandal in 2002. Since then, the company has been spinning off businesses and focusing on security, fire systems and flow control. The stock posted a 9% gain this year on top of a 68.1% return in 2009.
Honeywell International is another large-cap that cozies up with the small fare in the Delafield fund. It's been a holding since 2001, shortly after the aerospace manufacturer's failed merger with General Electric. "We like firms that have been to the altar once," Delafield says. Since 2001, the stock has continued to perform, posting a 21.7% increase in 2010 on top of last year's 23.1% gain.
Ilana Polyak is a regular contributor to Financial Planning.
J. Dennis Delafield
BA in French literature and art history, Princeton University
Experience: Senior portfolio manager, Tocqueville Asset Management (2009-present); portfolio manager, Delafield fund (1993-present); founder, Delafield Asset Management (1980-2009); managing partner, David J. Greene and Co. (1970-1980); partner for research, Sterling Grace & Co. (1959-1970)
Inception of fund: November 1993
Style: Mid-cap value
Three-year performance as of Aug. 13, 2010: 2.5%
Five-year performance as of Aug. 13, 2010: 8.4%
Expense ratio: 1.38%
Front load: Nine
12.73% vs. S&P 500