“ We think we ’ re done with the period of insanely low rates and are moving back to a normal period of interest rates , which means the cost of capital will be more normal ,” he says . “ Which means companies will have to invest more organically , and that should be good for economic growth .”
As a result , he and his firm believe that a return to basics should be good for the investment strategy that underpins the FMI Common Stock Fund .
40-Plus Years
FMI was founded in 1980 , and as of this year ’ s first quarter had roughly $ 14 billion in assets under management for registered investment advisors , domestic and international institutions , and individual investors through separately managed accounts and the firm ’ s four mutual funds . The asset mix is basically split between the SMAs and mutual funds .
English says FMI is an owner-operated firm that has been independent from the get-go and it plans to stay that way . He notes that the firm ’ s original focus was on the small-cap to SMID space because the firm ’ s managers felt that ’ s where most of the value resided .
“ As the firm grew and time went on , we felt there wasn ’ t much difference in how we did our research between a larger-cap company and a smaller-cap company ,” English says , adding that the firm later created funds tailored to the large-cap and international spheres .
The Common Stock Fund ’ s 42-year track record makes it the firm ’ s oldest mutual fund by 20 years . FMI says the fund aims to buy good businesses with
Portfolio Statistics
# Of Equity Positions 29 Average Mkt . Cap
$ 5.7 billion P / E Ratio 14.4x Std . Dev Fund / Benchmark 18.70 / 18.74 Turnover Ratio 36 % Net Expense Ratio 1.0 %
Stats as of 3 / 31 / 23 . Average market cap as of 12 / 31 / 22 . Standard deviation versus the Morningstar U . S . Mid Cap TR USD as of 4 / 30 / 23 . Fund turnover as of 9 / 30 / 22 . Sources : FMI and Morningstar . attributes such as high recurring revenue and returns on invested capital in excess to their cost of capital . FMI analysts scrutinize the economics of a business and the quality of the management team in the quest to find companies with above-average growth or improving profitability prospects . The end result is a concentrated portfolio of 30 to 45 mainly U . S . stocks and an annual turnover of 20 % to 40 %, which Morningstar says is well below that of most other funds in the Common Stock Fund ’ s mid-cap blend category .
From a style box perspective , the fund straddles the line between blend and value , but FMI proudly waves its value banner . “ We ’ re long-term , valued-oriented investors , but good businesses don ’ t go on sale for no reason ,” says Bloom . He explains the fund looks
for companies with some type of transitory cloud or controversy hovering over them that the fund ’ s managers think will eventually clear up but that in the near term cause the companies ’ shares to sell at discounts to their intrinsic value .
“ We look to avoid value traps regarding companies we think face insurmountable secular challenges ,” he says . “ And we try to invest in management teams that care about their stock and think and act like shareholders .”
The FMI managers are also very focused on downside protection . “ We start our process focused on what could go wrong with our investments before what could go right ,” Bloom says . “ And we ’ ve got a long history in our 40-plus years of protecting our clients on the downside in tough markets while capturing what we hope is most of the upside in rising markets and do that through a cycle .”
Morningstar analyst Chris Tate says capital preservation has helped underpin the Common Stock Fund ’ s longterm success . In a report , he noted the fund has held up much better than its Russell 2000 benchmark in each major downturn since English joined FMI in 1986 . Last year the fund lost 5.9 % while the Russell 2000 dropped 21.3 %.
Win Some , Lose Some
In the same report , Tate offered that FMI is “ value-focused to a fault to avoid paying for a good business above its intrinsic worth .” The result , he wrote , is that the fund has experienced periods of underperformance during rallies in smaller companies . But he acknowledged the fund ’ s emphasis on downside protection has shown its worth over the long term with category- and indexbeating performance .
The Common Stock Fund ’ s average annual returns have placed it in the top quartile in Morningstar ’ s mid-cap blend category during each measurable period from one year to 15 years .
Indeed , the Common Stock Fund ’ s average annual returns have placed it in the top quartile in Morningstar ’ s midcap blend category during each measurable period from one year to 15 years .
English doesn ’ t take exception to Tate ’ s comment about FMI being valuefocused to a fault . “ When you do what we do you have to realize that sometimes you ’ re going to miss out on some great stocks because you think the price the market is paying for those names is too rich . We just don ’ t play in those types of names ,” he says .
He adds that FMI prefers to stick with more reasonably priced names with solid balance sheets that offer downside protection . “ We ’ d rather get into a company with a solid but more sustainable growth rate and where we ’ re not paying for high expectations .”
FMI says its approach appeals to its investor base , which includes clients of
PHOTOGRAPHY COURTESY OF THE FIDUCIARY MANAGEMENT , INC . JUNE 2023 | FINANCIAL ADVISOR MAGAZINE | 41