Running two small funds in North Carolina, Steven Scruggs knows how to find promising, out-of-the way firms at bargain prices.
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When Steven Scruggs was in the market to buy a boat engine a few years ago, he found a bargain the way the thrifty value manager uncovers a stock. Scruggs discovered that an engine model called the Evinrude Ficht had a bad reputation; models made in the late 1990s didn't work properly. He also learned that the manufacturer fixed the flaws but continued to market the engine under the same name. The maker made a big mistake. Sales slumped because, although improved, the engine had been permanently tainted with bad publicity. Scruggs found his angle. He searched online and bought the improved version of the engine with the damaged name for a song.
That kind of thoughtfulness, tenacity, and nose for a bargain goes into the way Scruggs picks stocks for the two value funds he runs: Queens Road Value
It's no accident that he started the small-cap fund first. Scruggs knew that historical studies showed that value investing beats other kinds of investing over the long haul. He also learned that the small-cap value realm is where the greatest disparities between price and value exist.
"The asset class with the best historical returns and the highest percentage of firms yielding healthy amounts of free cash flow to the firm relative to price is small-cap value," Scruggs says. "It's the most inefficient part of the market."
Scruggs also scouted out the best practitioners and watched how they picked stocks and ran their portfolios. Investors he admires most, he says, include the managers at the Royce funds, John Rogers of the Ariel funds, and Robert Perkins of the Perkins funds.
Scruggs hatched the small-cap fund in June 2002 and the large-cap fund almost two years after that, while working for Bragg Financial Advisors in Charlotte, N.C. (The funds are named after the street on which the firm was located.) The firm was begun by J. Frank Bragg nearly 40 years ago. The second generation of Braggs--Frank Bragg's three sons, John, Benton, and Phillips--share in the business now. Scruggs, who has known the Bragg brothers since high school, married their sister.
For all their success in the advisory business, the Braggs hadn't thought about getting into the mutual fund business until Scruggs took it upon himself to arrange for all the legal and administrative legwork required for starting a mutual fund. Scruggs knew the fund business was more scalable than the advisory business, which is very labor-intensive. Besides, the Braggs, with Scruggs' help, were already running the large-cap portions of their wealthier clients' portfolios with individual stocks in a style that closely resembles that of Queens Road Value. Starting mutual funds seemed like a natural extension.