Investing in Smaller Innovative Companies: A Guide to Two Funds
When it comes to technology stocks, investors often focus on big names or “the next big thing” in the market. However, Robert Stimson, the chief investment officer of Oak Associates Funds, recommends diversifying investments with exposure to smaller innovative companies that are often overlooked in the market. This article explores two funds; the River Oak Discovery Fund and the Black Oak Emerging Technologies Fund.
Overview of the Funds
The River Oak Discovery Fund invests in tech-oriented companies that have market capitalizations of $5 billion or less. Its average investment stands at $2 billion. Despite incurring a higher-than-average annual expense cost of 1.19% of assets under management, the fund holds the highest rating of five stars from Morningstar. It ranks in the 6th percentile among 546 funds in Morningstar’s “Small Blend” category for five-year performance and 13th percentile among 374 funds for 10-year performance.
On the other hand, the Black Oak Emerging Technologies Fund invests in companies across a broader range of market capitalizations, including some small-cap stocks. The fund follows a similar strategy as the River Oak Discovery Fund. In contrast to the strict $5 billion limit of the River Oak Discovery Fund, Stimpson stated that the Black Oak Emerging Technologies Fund has no size restriction. This allows for long-term holdings that include big names such as Apple Inc. and Salesforce.com.
Diversifying with Concentrated Funds
Although both funds have concentrated investments with the River Oak Discovery Fund holding 34 stocks and the Black Oak Emerging Technologies Fund holding 35 as of March 31, they offer diversification opportunities in the small-cap technology space. Stimpson emphasizes identifying companies that focus on their niches rather than trying to grow into the next big thing. Oak Associates Funds look for companies that have a strong hold on their market niche, expressed through improving sales and operations, rather than grand visions for exponential growth. This narrow focus and better execution can support higher valuations over time while mitigating competition.
Shareholder-friendly Practices
In addition to the narrow focus of the companies’ management teams, the Oak Associates team also evaluates companies based on quality metrics that look for improving free cash flow yields. The team also looks for companies that exhibit shareholder-friendly practices, such as share buybacks that genuinely lower the share count, increasing earnings per share.
Avoiding Hype
Lastly, Stimpson advises investors not to get caught up in tech-focused hype, such as AI and ChatGPT, stating that hype can be more dangerous than an opportunity. He recommends looking for companies with revenue, earnings, and products.
Two Examples
Cirrus Logic Inc. and Kulicke & Soffa Industries Inc. are top holdings found in both the River Oak Discovery Fund and the Black Oak Emerging Technologies Fund. Cirrus Logic Inc. focuses on the chips that go into mobile devices and vehicles and boasts some of the biggest names in its customer base, including Apple. Kulicke & Soffa Industries Inc. makes equipment and tools and related software used by manufacturers of computer chips and integrated devices. The company is well-positioned to benefit from disruption in semiconductor manufacturing worldwide due to the Covid-19 pandemic.
Top Holdings of the Funds
The River Oak Discovery Fund’s largest holdings include Cirrus Logic Inc., Kulicke & Soffa Industries Inc., Advanced Energy Industries Inc., Cohu Inc., Asbury Automotive Group Inc., Korn Ferry, Kforce Inc., Ambarella Inc., Applied Industrial Technologies Inc., and Perficient Inc. The Black Oak Emerging Technology Fund’s notable investments include Apple Inc., KLA Corp., Advanced Energy Industries Inc., Cohu Inc., SolarEdge Technologies Inc., Cirrus Logic Inc., Cohu Inc., Ambarella Inc., Applied Industrial Technologies Inc., and Salesforce Inc.
Conclusion
Investors seeking diversification opportunities could consider investing in smaller innovative companies that focus on their niche markets. While investors could look to big names or “the next big thing,” the performance of smaller innovative companies demonstrates that there is value in investing in small-cap tech stocks. Exploring concentration funds, shareholder-friendly practices, and narrow management focus are key considerations to keep in mind.
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