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Making the Right Calls

John Walthausen launched his namesake firm and first mutual fund just as the housing bust was unfolding. Prescient moves since then are getting him noticed by small-cap investors. 

Rob Wherry, 06/30/2014

New York City is home to some of the mutual fund world’s largest players. But not every manager prefers Manhattan. There is a series of well-regarded investment firms that have chosen to set up shop in towns just north of the city, such as Purchase (Alpine Woods Capital Investors), Mount Kisco (DSM Capital Partners) and Cobleskill (Fenimore Asset Management). Geography hasn’t been a disadvantage. Technology keeps these firms wired-in to market happenings, and they certainly hold their own against their Big City counterparts when it comes to quality of management and performance.

Another such firm is Walthausen & Co., which has quietly built a reputation for keenly investing in small- and mid-cap stocks. It’s based in Malta, N.Y., a town about three hours outside of Manhattan near the Vermont border. John Walthausen founded his namesake firm in August 2007, after 13 years as a portfolio manager at Paradigm Capital Management. That tenure included a stint running Paradigm Value PVFAX between 2002 and 2007, a time when the fund gained an annualized 28.2% versus 16.9% and 17.9% for the small-value category and the Russell 2000 Value Index, respectively. The entire team that helped him generate that record followed him to the new firm.

Walthausen’s road to fund company founder is a familiar one in the industry. Many mutual fund managers have left established firms to go it on their own, including David Winters, who launched Wintergreen WGRNX after a long career at Mutual Series, and Dale Harvey, who used to run money at American Funds before forming Poplar Forest Partners PFPFX. The risk with taking this route is that the new firm toils in obscurity until it develops a track record, and even then assets can be hard to attract. Many firms fail.

“There is always an unknown that [a manager] may not be able to make it work,” says Steven Krawick, president of West Chester Capital Advisors in Johnstown, Pa. He has looked at the Walthausen funds but isn’t an investor.

John Walthausen and team have been able to avoid the pitfalls that have befallen other firms, despite some poor timing. The firm’s first fund, Walthausen Small Cap Value WSCVX, was launched in early 2008 just as the stock market was tanking. A poor first year can doom a new mutual fund. But the team navigated the downturn better than most peers and then posted outsized performance in the subsequent recovery, which attracted the attention of investors as it crossed the three-year mark near the top of the category rankings. The fund closed to new money in December 2012 after swelling to more than $550 million in assets. A second fund, Walthausen Special Value WSVRX, was launched in 2010. It has also met with success using similar investment criteria on stocks up the market-cap spectrum and remains open to new investors.

Walthausen chalks up the firm’s early accomplishments to several factors—an experienced team and a sensible strategy focused on long-term performance being chief among them. The firm also thinks its small-town location can give it an edge.

“We like it up here. The team has been very stable,” says DeForest Hinman, the firm’s director of research. “We try to avoid situations where we may get into a group think. We like to shift our focus from how the next quarter will look to what could happen to this company over the next couple of years. That helps us make better judgments.”

Sailing into a Storm
In the first letter to shareholders, a manager would prefer to tout the fund’s success during its inaugural year versus having to explain away some disappointments. Walthausen had the unenviable task of describing both situations to his investors. Walthausen Small Cap Value lost 29.5% its first 12 months through Jan. 31, 2009, which looked terrible at first glance but was considerably better than the 36.5% loss for the Russell 2000 Value Index. Walthausen didn’t exactly do a victory lap.

Rob Wherry is a mutual fund analyst with Morningstar.

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