Having experienced numerous cycles in his 43-year career, Richard Driehaus believes that the U.S. market is going through a painful consolidation phase that may be nearing an end.
"We could be in the process of making a bottom," says Driehaus, 66, co-manager of the $335.9-millionAGF Aggressive U.S. Growth
and founder and chief investment officer of Chicago-based Driehaus Capital Management LLC. "The market is still rotational and difficult, but it's forming a bottom, and in a trading type of range."
That suits Driehaus fine. A growth investor who has long been associated with momentum investing, Driehaus looks for buying opportunities even as the market remains volatile.
"If we can get those few ideas, then we can differentiate ourselves," says Driehaus, who works with co-managers Jeff James and Dan Wasiolek. "Some people are index-huggers. We don't do that. If there are growth opportunities, we should be there."
Driehaus focuses on smaller companies with accelerating earnings and cash flow, and positive earnings surprises and revisions. He and his team are well known for short holding periods -- the fund's turnover rate was 256% for the 12 months ended Sept. 30 -- and they will dump a stock at a hint of deteriorating fundamentals, or if there is another more promising holding.
While they may hold about 95 names in the fund, they will allocate up to 6% to high-conviction stocks. "We will tend to hold on to our winners," Driehaus says. "As the saying goes, 'Let your winners run.'"
It is the consistent, unwavering application of Driehaus's philosophy, he argues, that makes a difference. "I tell my analysts, 'Follow the philosophy. Don't be afraid.'"
Launched in June 1993, and based on a blend of the firm's small-cap and mid-cap strategies, the fund has been a top-quartile performer over the longer term. Over the last 15 years, the fund had an 11.8% average annual compound return, versus 8.7% for the median fund in the Global Small/Mid Cap Equity category where it currently resides, and 3.5% for the U.S. Small/Mid Cap Equity category with which it has long been associated. (At last report, the fund held 92.3% of its assets in U.S. equities.)
But the fund has also had prolonged losing streaks, such as in 2000-2002, when Driehaus admits he and his team made some ill-timed technology bets. The fund's 12-month returns have ranged from a euphoric 285% to February 2000, near the end of the technology boom, to a 63.3% loss in the period ended September 2001.
Historically, Driehaus and his team have been very active investors in three areas: consumer cyclicals, technology and health care. The latter remains a favourite sector and accounts for about 21% of the fund.
One representative holding is Illumina Inc. ( ILMN). The San Diego-based genetic testing firm made a splash in 2007 when it acquired Solexa Inc., which had more advanced technology. "They paid a very large price for it, and it was going to be dilutive [to earnings]," recalls Driehaus. "But they absorbed the acquisition and continued to make good gains."
Acquired in the mid-2007, the holding has doubled in price. "It's a classic stock for us," says Driehaus, adding that Illumina has continued to surprise on the upside. "It's a leader in a new technology, and it has large potential."
An investor with an encyclopedic knowledge of markets, the Chicago native discovered growth investing during high school when he came across an investment newsletter, America's Fastest Growing Companies, by John Herrold. As stocks such as Avon Products grew several hundred percent during the 1950s, Driehaus was hooked on the notion of earnings growth.
"These stocks were doing better [than the market] so it seemed like a very reasonable idea," he says, adding that he later refined his system to focus on small companies and those that generated earnings surprises.
After graduating in 1965 with a BSc. from DePaul University, Driehaus was an assistant to the director of research at local broker Rothschild & Co., an operation unrelated to the global N.M. Rothschild organization based in London.
In the summer of 1968, he joined A.G. Becker & Co., where he generated research ideas on small and mid-caps for the institutional trading department. Within two years, he was managing funds for the firm.
In 1973, Driehaus became research director at Mullaney, Wells & Co. He also acted as a broker-dealer for Twentieth Century, now known as American Century Investments.
In 1979, after a three-year spell as research director at Jesup & Lamont, Driehaus set up Driehaus Securities, a research broker that provided ideas to a select group of accounts. In 1982, he established Driehaus Capital to manage funds.
Today, the company oversees about US$5 billion in assets, including about C$410 million for AGF Funds Inc. Originally known as 20/20 Aggressive Growth, the fund was re-named following AGF's acquisition of 20/20 Funds Inc in 1995.
While Driehaus is less active than in the early days, when he typically put in 60 hours a week at the firm's elegant Victorian-era mansion in downtown Chicago, his main role is mentoring and ensuring consistency of style. "It's all about the philosophy, the process and sticking with it."
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