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Waiting to Pull Up Anchor

Small caps have reached the top of their cycle, manager Eric Cinnamond says. He’s hoarding cash for when the market turns.

Michael Brennan, 06/17/2013

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

By at least one standard, it might be difficult to be Eric Cinnamond right now. The brains behind River Road Asset Management’s small-cap strategy, which fuels ASTON/River Road Independent Value ARIVX, spent the winter watching mostly from the sidelines as the Russell 2000 Value Index posted scorching returns. After it shot up 15.5% in 2012, the small-cap index swelled by more than 8% this year through April 22.

Meanwhile, Independent Value, which accounts for $740 million of the $1 billion in assets Cinnamond’s strategies manage (the remaining $260 million are in separate accounts), has not done much. It’s up 3% on the year and appears unlikely for a performance boost in the short term. Cinnamond has fled from the party by unloading many of his holdings and letting cash build up to a whopping 58% of his portfolio as of March 31.

Given the recent disparity between Cinnamond’s performance and that of the Russell 2000 Value, how is it that he’s activated a soft close and is turning away would-be investors?

He reached his $1 billion limit mostly by way of inflows rather than from performance; Independent Value and his separate accounts netted $660 million worth of inflows in 2011 and $224 million in 2012. It suggests that Cinnamond’s 15-year track record has earned him a good deal of trust among investors.

Cinnamond says that his investment universe— the 300 small caps on his watchlist—has enjoyed a runup and is approaching what he believes is the peak of its performance cycle. A downturn, he believes, is approaching.

His performance over the course of the previous two market cycles gives his investors confidence in his long-term vision, even if it means he’s not trying to squeeze every last cent out of the ongoing small-cap boom. “We focus on adequate returns for the risk we’re assuming,” he says. “So, we don’t play along; we just pull back and wait. Sometimes, you have to underperform to have a lot of success later.”

A Proven Commodity
Cinnamond is pleased with his win rate, which, according to River Road’s documentation, sits at a handsome 84% from Nov. 1, 1998, through Sept. 30, 2012. The presentation materials for potential investors and financial journalists list every stock Cinnamond has purchased since he established his strategy at Intrepid Capital Management 15 years ago, through Independent Value’s January 2011 inception, to the present. Three columns of green print list all the buys that turned into profitable sells. A short list, in red, sits off to the right. Those are the ones that didn’t work out so well.

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

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