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By Janet Yang, CFA | 01-26-2016 11:00 AM

Seeking Exceptional Small Companies

The team at Brown Capital Management Small Company--Morningstar's 2015 Domestic-Stock Fund Manager of the Year--finds sustainable growth potential in firms that save time, lives, money, and headaches.

Janet Yang: Hi, I'm Janet Yang, a fund analyst at Morningstar. Today Morningstar announced its Fund Manager of the Year Awards for 2015. The Domestic equity award winners were the team members from Brown Capital Management Small Company. They are Keith Lee, Bob Hall, Kempton Ingersol, Damien Davis, and Andrew Fones.

Today I have with me Bob Hall and Keith Lee. Gentlemen, thank you for joining us and congratulations on the award.

Keith Lee: Thank you for having us and thank you for honoring us with your Manager of the Year Award. We are extremely pleased and honored to be selected and to be here with you this morning.

Robert Hall: And also be with such fine competitors.

Yang: It was a great year for you all. You easily won the award.

In 2015 the fund gained almost 9% in a year when most of your competitors actually lost money. Before we get into the drivers of 2015, I think it makes sense to lay the groundwork for how you got there.

This fund is pretty unique on a few levels. One of those is the companies that you're looking at. You make a distinction between small company versus small-cap stock. What does that mean to you?

Lee: This year we will be celebrating our 25th anniversary. From the beginning, we thought it was important to differentiate between a small cap and what we call a small-company portfolio. The significant difference is that we define smallness in terms of operating revenues as opposed to market capitalization. We think that's a much better indicator of size.

For example, in 1991 if you go back and look, IBM was in a downward market spiral, and we said that if the stock price of IBM drops far enough, it's conceivable that IBM will start appearing in small-cap portfolios. We argued then, as we would today, a company with multi-billion dollars of revenues, multi-billion dollars of assets, hundreds of thousands of people is anything but small.

We get our jollies by going out, identifying companies early on in their life cycle. And it's arbitrary. We set a limit at $250 million or less at the time of initial investment. [This is] a long-winded way of answering your question, Janet, but we think revenues are a better indicator of size of a company than market capitalization.

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