PORTFOLIO SPOTLIGHT
“ It ’ s not a quantitative screen ,” he says . “ It ’ s more our industry experience and us just being around small-cap growth as part of our career .”
Part of Barr ’ s screening process hearkens again to Charlie Munger . “ Munger preached the importance of investing in good businesses at a fair price , rather than fair businesses at a good price ,” he says . He adds that Munger also stressed the importance of patience and compounding .
Barr ’ s value approach centers on investing with a margin of safety . His ideal company is one that ’ s investing in a new business area that could significantly expand its operating margins , even if the financials don ’ t show it yet . “ We try to look over the horizon to find the new thing that will establish growth ,” Barr says .
But he adds that it ’ s important for a company trying to enter a new market to have an established business that either generates cash or is profitable . Such legacy businesses protect a company if the new market has not played out as expected .
“ We ’ ve had good downside protection historically ,” Barr says . “ I think it ’ s because of these legacy businesses and the margin of safety they offer .”
According to Morningstar , his fund has beaten its small-growth category peer averages on both the upside and downside during the past 10 years .
Potential Winners
One of the portfolio companies Barr has high hopes for is Aspen Aerogels , a maker of specialty insulation .
“ You take a piece of this [ material ] that ’ s as thick as a piece of paper , put a blowtorch on one side and your hand on the other and you won ’ t feel the heat ,” Barr says . “ It ’ s a remarkable innovation . And it ’ s an established business with the energy industry with subsea pipelines , oil refineries and other industrial applications .”
He notes that a few years ago Aspen discovered its insulation could be used to prevent spontaneous combustion fires in lithium-ion batteries for electric vehicles . But he also likes that Aspen has a legacy industrial business that can subsidize the large capital spending requirements of its new EV-related business . And he notes the EV business has lined up potential customers such as General Motors , Toyota and several others .
“ It ’ s a very big market , and the company is hardly known at all ,” Barr says . “ It ’ s starting to cross over into profitability , but we need General Motors to sell more electric vehicles . We don ’ t need them to sell as many as they ’ ve publicly talked about , but we do need EV adoption beyond Tesla .”
Another portfolio company with great potential , he says , is FARO Technologies , which makes high-precision measurement systems for industrial applications both big and small . Barr says the company previously overinvested in unrealistic growth plans that didn ’ t pan out . He believes that FARO ’ s new management team is targeting appropriate growth and investment .
“ What ’ s attractive here is that FARO is valued at about one times enterprise value to revenue , and its industrial technology peers trade at four or up ,” Barr says . He posits that the company ’ s current strategy could put it on the path to becoming a quality compounder .
Cash Is Temporary King
As of year-end 2023 cash represented a whopping 22 % of the Aggressive Growth Fund ’ s portfolio . No , that ’ s not a misprint .
“ We generally run more fully invested , certainly under 10 %, and I love to be 3 % to 4 %,” Barr says . “ But we ’ ve had significant inflows going back to the second half of last year . I steadily and regularly purchase positions after we get cash inflows , but the end result is still a lot of cash .” ( The year-end figures were the most recently available when this article was written .)
Barr points out that most of the new capital is going into existing portfolio holdings that he says are in the hidden and transition stages , and which he believes are attractively valued or making more progress than the market reflects today .
“ I get to add to those positions that are moving forward ,” he says . “ Without it , it would be only their natural appreciation that would carry them to be larger positions in the fund .”
ADVISOR PHOTOGRAPH COURTESY OF NEEDHAM & COMPANY MAY 2024 | FINANCIAL ADVISOR MAGAZINE | 47