Satuit Capital Micro Cap Fund Is Riding High

FOR ROBERT SULLIVAN, WHO RUNS THE $76 MILLION Satuit Capital Micro Cap Fund, investing is a bit like riding a powerful steed. If you don't pay attention, you can get thrown, with painful consequences.

During the second and third quarters of 2006, Sullivan, who has been riding horses off and on for most of his 48 years, suffered losses of 7% and 1.41%, respectively. "I felt like I had fallen off my horse and didn't know how to get back on," he recalls. "It's the only time in the eight-year history of our fund that I started to question our investment philosophy and process."

The more he thought about it, Sullivan says, the more he became convinced that he temporarily had deviated from his standard practice of evaluating companies on their revenue growth, margin expansion, balance-sheet strength and cash flow. "We lost sight of the fundamentals and picked some losers," he recalls. "It was like being thrown off my horse" on one of his rides on the land around his Johns Island, S.C., headquarters. Fortunately, the portfolio manager was able to brush himself off, remount and get back on the trail that he'd successfully followed before.

BY QUICKLY REFOCUSING ON the fundamentals, Sullivan was able to guide the no-load fund (SATMX) back into the black the next quarter, posting a 7.32% return. He ended 2006 with a full-year gain of 5.65%.

Through the end of August 2009, Satuit Capital Micro Cap's one-, three- and five-year returns of a negative 8.87%, minus 2.70% and plus 5.66%, respectively, outstripped the Russell 2000's by 12.42, 3.38 and 3.45 percentage points.

"Morningstar data tells us we outperformed 98%, 88% and 94% of small-cap growth funds during those periods," Sullivan says. "And in 2007 and 2008, arguably the two worst years in recent memory, we outperformed 86% and 80%, respectively, of our competition in our category, according to Morningstar data."

This year, Micro Cap has continued to sizzle. Through August, the fund, which is rated four stars by Morningstar, was up 29.85%, versus a 15.75% gain in the Russell index. It outpaced 90% of all small-cap growth funds. Sullivan attributes the strong showing to the lessons he learned in 2006, especially the importance of strong fundamentals.

This year's performance has been bolstered by the returns of a number of key holdings, including Chinese insurance intermediary CNinsure (CISG), semicondutor maker NetLogic Microsystems (NETL), and specialty retailer hhgregg (HGG), up 88%, 100% and 99%, respectively, through August.

Most of the 87 companies in the fund's portfolio have stock-market values of less than $500 million. The holdings generally turn over about twice a year. The fund is no-load, but has a somewhat pricey expense ratio of 1.95%.

WHAT DOES SULLIVAN SEE AHEAD? "With respect to the current market, we are cautiously optimistic," he says. "It feels as though the path of least resistance is higher. We have had a tremendous run off the March lows. We are seeing 'green shoots' [signs of recovery] all over the globe. The question for the U.S. economy is not how long the recession will continue, but what the shape of the recovery will look like. But the opportunities are there."

Micro- and small-cap stocks historically have led the economy out of recessions and bear markets, the investment manager says. "It's frustrating to read Wall Street strategists and the financial press drone on about how large-cap is better than small-cap," he adds.