Wanger

Ralph Wanger

USA Today asked a group of portfolio managers who they would prefer manage their personal wealth, and Ralph Wanger was the most frequently chosen advisor ahead of even Warren Buffet. Wanger is known for leading the Acorn Fund, one of the top performing small-cap funds in the U.S. between 1970 and 1988. During that time period Acorn yielded a 16.3% annualized return significantly above the S&P500 Index during the same span. One of Wangers most impressive success stories is when he purchased the stock of International Game Technology, a leading producer of slot machines for $1 a share in 1988, just after new management had taken over, and later sold the stock in 1993 when the price hit $40 per share.

Wangers’ philosophy is to invest in superior small company stocks that will benefit from general trends. He points to general economic, social and technological trends as being the main drivers for corporate sales and profits. His success has stemmed from observing these trends and pointing out which of these trends would be the longest lasting. In general, Wanger attempted to focus on trends that he felt would last at least 4-5 years. His ability to identify long-term trends that would give a particular business an edge is what set him apart from other investors. During his run some of the trends he exploited were:

• The information revolution, and its impact on costs

• The expansion of world telephone and data networks

• The business of leisure, boosted by affluent older baby-boomer

• Outsourcing, as companies save on unnecessary components and focus on their core functions

• Money management, necessary for the survival of an aging population

Wanger feels that many analysts often neglect small companies even though the small companies are the ones that most often carry the greatest growth potential. In his book “A Zebra in Lion Country,” Wanger points out that most money managers tend to carry a herd mentality that forces them to follow mainstream investing trends that are typically safer, but that the best investment opportunities are characteristically “just outside the path of the herd.” Investing “outside the pack” carries more risk and requires more specific research and analysis, but ultimately it is where the most profitable investments lie. Overall Wagner has 8 fundamental rules for picking the right small market companies to invest in: (Market Capitalization <= 1,000,000,000 )

1. Growing Market for product(s) and strong expected earnings growth

2. Dominant market share

3. Outstanding management

4. Expert knowledge of its own business/industry with a good organizational design and inventory management

5. Skilled in marketing

6. Dedicated to customers

7. Strong balance sheet/high profit margins and low debt

8. Good value: The price has to be right.

My first inclination when I read these principles was that the general philosophy was similar to that of the CANSLIM approach. They both seek smaller companies with growth potential, quality management, leaders of their respective industries, solid financials, and they both emphasize the importance of general market trends. Although many of the same rules can be found in both philosophies, Wanger does not consider himself a short-term investor but rather a long-term investor. The CANSLIM approach although philosophically similar, is definitely catered towards a short-term, get in get out, momentum based approach, where certain indicators would dictate when to get out of a particular investment, regardless of the amount of time one has owned the stock. The Acorn Fund averages less than 30 percent turnover per year, whereas the average stock fund portfolio turns over completely in the same time frame. Wanger’s philosophy is that if the proper research was done in the initial stock selection phase, based on identifying a critical long-term trend, the stock should be worth holding on to until the point where one anticipates the company no longer being able to capitalize on an initially identified trend or when a new trend alters the existing markets or business model. There are times when Wanger does advocate selling earlier than planned, and that is when P/E ratios rise to relatively dangerous levels, contrary to the CANSLIM stocks that often carry very high P/E ratios. When P/E ratios rise