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Ford Draper Jr., Kalmar Investments

Inspired by a vessel that brought Swedes to the New World, Draper has built a firm that emphasizes results over renown.

Dan Culloton, 12/14/2009

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Ford Draper Jr. doesn't own a yacht, was never in the Navy, and owns farmland. He has spent enough time on the water, however, to know a useful nautical allusion when he hears one.

Nearly 30 years ago, when Draper's wife suggested that he name his new investment boutique after a 400-year-old ship that few people outside of Delaware and Sweden knew ever existed, he got it right away. The Kalmar Nyckel wasn't the most famous vessel that ferried settlers to the New World during the 17th century, but the ship, named for its Swedish home port and the fortress that guarded it, was among the most successful. In 1638, the armed merchant ship carried inhabitants to the colony of New Sweden, the first permanent European settlement in Delaware Valley. The Kalmar Nyckel made four round-trip voyages between the old world and new, more than any other craft before the American Revolution, including the more heralded Mayflower. It also outlived more than one captain.

The Kalmar Nyckel embodied a lot of the values Draper wanted to undergird his firm: an emphasis on results over renown, crew over captain, and repeatable rather than unreliable returns. "The name resonated from an organizational standpoint," Draper says. "There was a good story behind it."  The story has been good at Kalmar Investments, too. The firm, founded in 1982, has delivered strong returns for investors over time. Anyone who put $10,000 in Kalmar's Growth-with-Value-Small-Cap separate account when it opened on June 30, 1982, would now have more than $418,000. That 14.7% annualized return is more than twice the Russell 2000 Growth Index's during the same stretch. Similarly, $10,000 plunked into Kalmar's open-end mutual fund of the same name when it opened on April 11, 1997, would now be worth $22,322-a 6.6% annualized gain versus a 3.5% yearly gain from the Russell 2000 Growth.

Not Speculators
The Kalmar Nyckel analogy only goes so far, however. Investing in the New Sweden Company, which underwrote the Kalmar Nyckel's first voyage, was a wildly speculative affair. The success of a midwinter sea journey and a settlement in the North American wilderness was far from certain.

Draper and his colleagues aren't speculators. They fancy themselves fractional, long-term owners of businesses. So, they prefer to rely on original fundamental research to find and buy shares of small-growth companies with durable competitive advantages in large and growing markets. Such firms, if well managed, have the earnings, cash flow, and reinvestment opportunities to fuel growth for a long time. If bought at the right price, they can also produce good long-term returns with low risk.

Though Draper and his team coined the phrase "growth-with-value" to encapsulate the approach, they are not value or even growth-at-a-reasonable-price investors. Indeed, some of the firm's portfolio holdings, such as business software firm Cybersource CYBS, can look rather pricey by traditional measures such as price/earnings. Rather, the Kalmar crew thinks that its original, bottom-up research can uncover companies with growth prospects or positive developments that the market has overlooked. Such stocks may not be traditional value stocks, but they can still be inefficiently valued, Draper argues.

It's a strategy Draper developed out of practicality early in his career while working for Baker Fentress & Co., a closed-end fund that traced its corporate history to 1891. When he started at Baker Fentress in the 1970s, capital gains tax rates were high-nearly 40%. The fund needed rejuvenation, Draper says. It owned a lot of large, former growth companies that were beginning to gather moss. To justify selling one of these behemoths and taking a tax hit, Draper and his colleagues had to find replacements that were capable of making up for the tax haircut by generating more sales and earnings growth than the market expected over a long term. "It didn't make sense at the time to sell IBM and buy Eastman Kodak" Draper says.

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