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A Gold-Rated Pair for Risk-Averse Investors

A Gold-Rated Pair for Risk-Averse Investors

Alec Lucas: Gold-rated FMI Large Cap and Gold-rated FMI Common Stock are an effective pair for risk-averse investors. FMI's stable 10-person management team runs both funds with the same collaborative, high-conviction approach.

FMI Common Stock focuses on companies with market caps below $5 billion, and FMI Large Cap on companies with market caps above $5 billion. Together, they provide exposure that spans the U.S. market-cap spectrum. Rather than holding a wide swath of U.S. stocks, each fund concentrates its bets. FMI Large Cap typically invests in 20 to 30 stocks, and FMI Common Stock in 40 to 50, because smaller companies tend to be more volatile. The stocks held in each are carefully chosen. Management looks for companies with durable business models and strong leadership that generate superior profitability through a full economic cycle.

Valuation, though, drives the FMI team's investment decisions. They only buy stocks at a minimum one third discount to their estimated intrinsic worth over a five-year holding period. Such bargains tend to occur because of controversy, uncertainty, or short-term headwinds.

The team doesn't get every pick right, but both funds have strong long-term track records, largely because the companies they invest in prove to be resilient in market downturns. This was especially evident in FMI Common Stock's performance during the dot-com bear market. Its light tech footprint and picks like H&R Block helped the fund to a 20.9% peak-to-trough cumulative return, which was 65 percentage points more than the Russell 2000 Index during the same stretch.

FMI's willingness to close both funds to new investors to preserve their market-cap flexibility instills confidence that the firm prioritizes current shareholders' interests. Indeed, the FMI managers are among them as they invest alongside those shareholders at industry leading levels for the longer tenured ones.

The two funds' conservative portfolios are prone to lag in up markets, as has been the case recently, but over a full cycle they have shown they can deliver index and peer-beating results, which look even more impressive when adjusted for risk.

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About the Author

Alec Lucas

Director of Manager Research
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Alec Lucas is director of manager research, active funds research, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is a voting member of the Morningstar Medalist Ratings Committee for U.S. and international fixed-income strategies, covers fixed-income strategies from asset managers such as Baird and American Funds.

Lucas is also active in parent research. He is a voting member of the U.S. parent ratings committee and previously served as the lead analyst for Franklin Templeton, Capital Group, and Vanguard, among other firms.

Lucas was a strategist on Morningstar's equity strategies team prior to assuming his current role in June 2022. He covered equity strategies from asset managers such as Primecap and American Funds and received the 2019 Citywire Professional Buyer Rising Star Award.

Before joining Morningstar in 2013, Lucas worked as a minister as well as a professor for Loyola University Chicago, among other institutions. From 2010 to 2011, he was a Fulbright Scholar at the University of Heidelberg.

Lucas holds bachelor's degrees in philosophy and classics from the University of Missouri-Columbia, where he graduated summa cum laude and with departmental honors, and a Master of Divinity, summa cum laude, from Trinity International University. He also holds a doctorate in theology, with distinction, from Loyola University Chicago and has published several articles and one book within that field.

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