Fund name: GRT Value (GRTVX)

Objective: The fund’s investment objective is capital appreciation, which they hope to obtain by investing primarily in undervalued small cap stocks. The current market cap for their universe-of-interest is $27 million to $3.8 billion. They can also invest up to 10% in foreign stocks, generally through ADRs. There’s a comparable strategy – the "GRT Value Strategy – Long only U.S. Equity Strategy" – used when they’re investing in private accounts. They describe the objective there in somewhat more interesting terms. In those accounts, they want to achieve "superior total returns while" – this is the part I like – "minimizing the probability of permanent impairment of capital."

Adviser: GRT Capital Partners. GRT was founded in 2001 by Gregory Fraser, Rudolph Kluiber and Timothy Krochuk. GRT offers investment management services to institutional clients and investors in its limited partnerships. As of 3/19/09, they had about $202 million in assets under management. This is the only mutual fund they manage.

Managers: The aforementioned Gregory Fraser, Rudolph Kluiber and Timothy Krochuk. Mr. Kluiber is the lead manager. From 1995 to 2001, he ran State Street Research Aurora (SSRAX), a small cap value fund which is now called BlackRock Aurora. Before that, he was a high yield analyst and assistant manager on State Street Research High Yield. Mr. Fraser managed Fidelity Diversified International from 1991 to 2001. Before that he analyzed stuff (shoes, steel, casinos) for Fidelity. Mr. Krochuk managed Fidelity TechnoQuant Growth Fund from 1996 to 2001 and Fidelity Small Cap Selector fund in 2000 and 2001. Since 2001, they’ve worked together on limited partnerships and separate accounts for GRT Capital. All three managers earned BAs from Harvard, where Mr. Kluiber and Mr. Fraser were roommates. Messrs Kluiber and Fraser have both earned MBAs from UCLA and Pennsylvania, respectively.

Management’s Stake in the Fund: As of the most recent Statement of Additional Information, Mr. Kluiber had over $500,000 in the fund and Messrs. Fraser and Krochuk each had over $100,000. According to Mr. Krochuk, the managers, collectively, own 79% of the fund.

Opening date: May 1, 2008.

Minimum investment: $2,500 for regular accounts, $500 for retirement accounts and $250 for spousal IRAs.

Expense ratio: 1.30%, after waivers, on assets of $2 million. There’s also a 2% redemption fee for shares held fewer than 14 days.

Comments: Investing in actively-managed funds is inherently risky. In addition to market risk (stock market crashes . . . I mean, "corrections"), you need to accept "manager risk." That is, the prospect that your star manager will turn out to have been lucky rather than talented. GRT Value offers considerable protection against each.

With regard to manager risk, it’s pretty clear that the managers have proven star power and staying power. GRT Value seems to be an upgraded version of State Street Research Aurora, which Mr. Kluiber ran with phenomenal success for six years. Morningstar’s valedictory assessment when he left the fund was this:

The same analyst noted that the fund’s risk scores were low and that "[m]anagement's willingness to go farther afield in small-value territory has been a boon over the long haul. For instance, management doesn't shy away from investing in traditionally more growth-oriented sectors, such as technology, if valuations and fundamentals are prime." The article announcing his departure concluded, "Kluiber had built a topnotch record since Aurora's 1995 inception. The fund's trailing three- and five-year returns for the period ending April 27, 2001, rank in the top 5% of the small-cap value category; Aurora also boasted relatively low volatility and superior tax efficiency."

Mr. Fraser’s career at Fidelity Diversified International (FDIVX) was much the same. Mr. Fraser was one of the few international managers to rely on quantitative models for his stock picking, and the results were spectacular. A sampling of Morningstar’s commentary during Mr. Fraser’s last couple years helps illustrate the point:

• [A note to Mr. Fraser’s successor:] It’s hard trying to live up to a legend (11/01)



• Under Fraser, this offering was the pick of Fidelity's foreign lineup and was among the foreign-stock category's elite (06/01)



• During his tenure, Fraser became one of the more bankable managers in the business, so he will be missed. Indeed, under his watch, the fund has posted top-half returns for eight consecutive years--a feat matched by few other foreign-stock offerings. (It beat more than 90% of its rivals over the trailing 5-year period.) (04/01)



• Like other foreign funds, this offering had a tough 2000, shedding 9% of its value. It could have been worse, though: More than three fourths of all foreign funds suffered larger losses. . . Through time, Fraser has repeatedly made the right portfolio shifts . . . (01/01)



• Fidelity Diversified International Fund has proved itself in all kinds of markets. This fund has taken consistency to a new level. It has now landed in the foreign-stock category's top half for seven consecutive years. That means it has successfully negotiated events such as the Mexican peso crisis in 1994, the Asian swoon of 1997, and the recent trend-driven market. And in a rare occurrence at Fidelity, it has done so with the same manager, Greg Fraser, at the helm. . . It's hard to find fault with the fund (03/00).

Mr. Krochuk, with less time as manager than either of his peers, appeared to be still refining the quantitative models he used at his Fidelity charges. TechnoQuant Growth (a name that recalls the ‘90s about as instantly as bell bottoms recall the ‘70s) had solid long-term returns, though inconsistent ones. He inherited a really weak small cap fund and improved it, but wasn’t at the helm long enough to generate a substantial record.

Since 2004, the trio have been managing separate accounts using the strategies embodied in both Aurora and GRT Value. They modestly trailed the Russell 2000 index in their first year of operation, then substantially clubbed it in the following three. Mr. Krochuk, who was kind enough to chat with me for an hour recently, argues that the structure and atmosphere of GRT Capital Partners is conducive to long-term success. He noted that when they left Fidelity and State Street, the trio was managing over $10 billion. The work was exhausting, all-consuming and, they believed, unsustainable. Their decision to leave was driven by the desire to do well for their investors and "still have a good life." With that goal in mind, they’ve created "a collective of professionals" – a company in which there’s no hierarchical division between the managers and the analysts. Instead, all of the investment professionals are experienced, all of them "run money" and all of them collaborate. "We’re just grinders," he noted. "We come in every day and do our jobs together." In baseball terms, they were hoping to make contact and hit lots of singles rather than counting on swinging for the fences in pursuit of rare, spectacular gains.

With regard to market risk, it’s clear that the managers have thought these things through. At an empirical level, Aurora and Diversified International had long records of negotiating all sorts of markets with less risk and higher returns than their peers. Mr. Krochuk makes the additional argument that the managers’ quantitative discipline allows them to create an additional layer of protection for the portfolio.

Think of portfolio construction in terms of weaving. The horizontal fibers in fabric are called the weft, while the vertical ones are called the warp. Most portfolio managers rely on a bunch of factors that help predict returns. Think of those as the horizontal, weft fibers. So they look at a bunch of measures that lets them determine whether a stock is undervalued (p/e, p/b, p/cf) and whether there’s a prospect for unlocking that value (a catalyst). At the same time, most managers have a limited repertoire of risk management strategies. Think of those as the vertical, warp fibers. Managers typically try to diversify (by industry, size or country) and they may hold cash if they’re having trouble finding value, but that’s about it. This is where GRT’s quantitative disciplines might add real value. They’ve identified several dozen "conceptual buckets" – unconventional ways of identifying commonly overlooked risk factors. Factors like "currency sensitivity" or "nearest neighbors" allow them to analyze their portfolio to determine whether an apparently diversified mix of stocks actually has a large number of companies (of different sizes, in different industries, from different nations) susceptible to the same underlying risk factors. If so, they can control for them. They couple the notion of conceptual buckets with a "farm team" system that has them make small, controlled initial investments (where a new stock might be limited to 0.4% of the portfolio). They elevate the stock to major status (perhaps 1.0 – 4.0% of the portfolio) only after gaining experience with a company and confidence in the viability of their investment thesis.

In effect, they weave together a stronger portfolio by including far more "warp" fibers than their peers; that is, far more sensitivity to the sorts of risks that ordinarily escape notice allows them to preserve the returns that their valuation research, the horizontal "weft" strands, offers.

Bottom Line: Nothing in life is certain, but the prospects for GRT Value’s future are about as close as you’ll get. The managers have precisely the right experience. They have outstanding, complementary track records. They have an organizational structure in which they have a sense of control and commitment. And they’re offering investors a chance to join them in a fund that they’re selling at a substantial discount. Traditionally, small caps – and particularly small value stocks – have led the market in the years after a recession which might make this an opportune time to begin investing there. And here.