In one respect, Scott Moore probably never belonged at American Century funds. “I grew up in a small town called Carterville, Illinois, with a population of about 3,000,” says the 54-year-old entrepreneur and manager of Nuance Mid Cap Value (NMAVX). Though American Century is hardly a Wall Street behemoth, for Moore, working at the Kansas City, Mo.-based firm with $100 billion in assets and 1,300 employees still required some cultural adjustments.
Moore now runs his boutique, three-fund shop— Nuance Mid Cap Value (NMAVX), Nuance Concentrated Value (NCAVX), and Nuance Concentrated Value Long-Short (NCLIX)—that is more like Carterville than Kansas City. The firm has 16 employees and defined capacity constraints for each fund. Mid Cap Value is the largest at $935 million. Combined with privately managed accounts run in an identical style, the strategy has $1.3 billion, and Moore sees its total capacity at $2 billion and $3.5 billion for his entire firm.
Moore launched his firm, Nuance Investments, in October 2008, during the worst bear market since the Great Depression. He spent the prior 12 years first as an analyst and then in 1999 as co-manager for American Century Equity Income (TWEIX). During that period, he trounced the S&P 500’s (.SPX) 123% cumulative return with a 226% one. He also managed American Century Mid Cap Value (ACMVX) from its 2004 inception and co-managed American Century Value Fund (TWVLX), again besting his peers. Under Moore, the three American Century funds grew to $12 to $13 billion, from $1 billion when he started.
“It’s a great firm, but managing that large amount of money gets difficult [to maneuver],” Moore says. “What I really wanted to do was start a firm that emphasized that flexibility element of investing.”
Staying small and nimble helps. Nuance Mid Cap’s 9.2% five-year annualized return has beaten 95% of the fund’s Morningstar category peers, including American Century’s 8.6%. Moreover, the midcap strategy’s private accounts, which launched before the fund in 2008, have a 15.2% 10-year annualized return versus the Russell Mid Cap Value Index’s (.RMCCV) 13%. Moore calls launching his firm during the financial crisis “the best decision I ever made.”
Adding to the small-town vibe, Moore brought some American Century colleagues with him, including co-manager Chad Baumler and senior analyst Laurie Kirby. “Our entire investment team has spent the vast majority of our careers following this same investment process,” Baumler says. “We’ve seen how this process works through multiple economic cycles.”
Of course, value investing is nothing new. What’s different is the intense focus on specific companies and risk control. Key to Moore’s strategy is accurately calculating a stock’s potential upside and its possible downside. Nuance’s seven-member investment team covers 250 “mature businesses with dominant market share positions and sustainable competitive advantages,” he says. They then seek out the ones trading cheaply that are facing temporary setbacks.
To determine what a company should be worth, Moore and Baumler determine what its “normalized earnings” are—what the company would earn under ordinary conditions during an economic cycle. That way, if a setback is truly temporary, they can calculate how much potential upside a company’s stock should have when earnings recover. They can also get a sense of how far shares could fall if trough conditions happen, giving each stock an upside/downside ratio.
Consider poultry company Sanderson Farms (SAFM), Nuance Mid Cap’s second-largest holding. The U.S.’s third-largest chicken producer, it has the industry’s best balance sheet and growing market share, Baumler says. Yet the stock fell 28% in 2018 as trade tensions led to “a protein glut in the market,” Baumler says. The price of boneless chicken breast—the most valuable chicken part—is the lowest in 20 years.
Sanderson’s 2018 earnings per share plummeted to $2.70 from 2017’s $12.30. Moore expects normalized earnings to be $11 and believes the setback is temporary because chicken consumption has increased 25% in the U.S. in the past decade. He sees a 40% to 50% potential upside for Sanderson and a 35% to 40% maximum downside if the economy and the poultry industry collapse—a suitable risk-reward ratio.
A 40% maximum downside might not seem attractive until one considers the valuations of all 250 high quality stocks Nuance covers. On a price-to-earnings-ratio basis, the group typically trades at nine to 10 times at recessionary levels, Moore says. He sees the “upside” for the group at minus 15% to minus 20% and the worst-case downside at minus 55% to minus 60%. But he’s not calling for some market problem. “To get to the valuations we believe make sense over time companies are either going to have to grow into them or there’s going to have to be a market selloff,” he says.
Sector-wise, Moore currently favors the insurance industry, particularly property and casualty insurers such as The Travelers Companies (TRV), which he sees as suffering from extreme weather events in 2018. He acknowledges climate change will increase such events, but thinks an industry leader like Travelers can pass such costs to consumers with price increases.
Sometimes company setbacks aren’t temporary. In early 2017, Moore owned energy stocks such as Frank’s International (FI), but changed gears. “We’re seeing a significant move towards the electrification of cars,” he says. “You couple that phenomenon with the renewable energy market share gains.” Nuance sold its energy stocks in late 2017. To its benefit—the energy sector fell 18% in 2018.
It is that sort of risk control which gives Nuance its edge.
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