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Lines of Communication

To the team at Conestoga, a key part of investing is openly discussing the firm’s successes and failures.

Michael Brennan, 02/11/2013

This article originally appeared in the February/March 2013 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000.

To hear them tell their story, the proprietors of Conestoga Capital Advisors deal as much in communications as they do in the mutual funds they operate. Communications with the companies whose stocks they buy. Communications with the advisors who invest in their funds. Communications with each other. It’s an awful lot of talking in a business more identified with the top-down scrutinizing of a sea of metrics. But give the people at Conestoga enough time and you might begin to see things their way: that good investing can be, as much as anything else, about having your ear to the ground and seeking out meaningful discussions with the people with whom you intend to do business.

They showed that much right away. In 2002, it might have appeared that Conestoga had some explaining to do. Bill Martindale and Bob Mitchell had just founded the company with W. Christopher Maxwell and Duane R. D’Orazio to ply a small-cap strategy in the aftermath of the dot-com bubble that had stoked and then set ablaze the markets during the previous several years. For some, it was immediately a tough sell. “In hindsight,” Mitchell says, “we started our firm in a very challenging time period.”

If Conestoga had been founded by less-established proprietors, that might have been the end of the story. But the team members had a long track record and a book of loyal investors who had followed them from their previous company. They’d proven their ability to make hay by digging up stocks that had quietly established track records and operational profiles that strongly suggested long-term success—the opposite of the dot-com du jour, in other words.

“That period was challenging for us from a relative-performance perspective,” Mitchell says. Sure enough, Conestoga Small Cap CCASX, the company’s first fund, trailed the Russell 2000 Growth Index badly in the fund’s first year. But by 2004, the fund began to edge past the index and has maintained that annualized-return advantage nearly every year since. More important than the results of those individual years, though, are the fund’s long-term returns; the company’s own written philosophy does, after all, point out that Conestoga hunts for “companies that are capable of growing through multiple business cycles.” By that standard, it’s performing admirably, with five-year, 10-year , and since-inception returns surpassing those of the index.

According to Mitchell, Conestoga’s funds and separate accounts benefit from the firm’s independence. Without a parent company calling the shots based on short-term fluctuations, the company’s principals are free to keep their eyes on the horizon. “We have the character and conviction to implement our strategy on a quarterly and long-term basis, and our track record bears that out,” he says. “We have been able to perform better than the index with significantly less risk as measured by standard deviation.”

As Conestoga has patiently explained its strategy and backed it up with more than a decade of success to back it up, investors have taken notice. The firm began with $104 million under management, with $43.9 million in its small-cap strategy. By 2009, those numbers were up to $345 million and $294 million, respectively, and they had swelled to $840 million and $779 million, respectively, by September.

Mitchell says Conestoga will close its small-cap strategies to new investors when assets in that category cross the $1 billion mark. “We’re looking for more-controlled growth going forward,” he says. “We’ve worked hard to develop the clients we have and appreciate the trust they’ve shown in us. We have a very solid track record historically, partially by limiting the assets we bring in.”

Michael Brennan is a copy editor with the Morningstar Fund Research Team.
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