Process of Elimination
The Northern Small Cap Core Fund Managers Aim for an Attractive Risk-adjusted Return


July 2012

Even in a challenging economic environment, there usually is no shortage of prosperous American companies. So, one key to managing equity market risk, say Northern Small Cap Core Fund co-managers Robert Bergson and Alex Ryer, is to make separating the corporate wheat from the chaff a top priority.

"We use a highly disciplined, quantitative process to kick out companies from consideration that are high risk," says Bergson. "There are thousands of small-cap stocks to choose from, so it doesn't make sense to compromise on quality."

Not making waves
Besides emphasizing risk management, Bergson and Ryer designed the Fund's selection process to recognize the unique characteristics of small-cap investing. These include the importance of keeping turnover to a minimum and taking small positions in a large number of stocks.

Though many small-cap funds hold about 100 companies, the Northern Small Cap Core Fund owns more than 1,000 stocks. Some of those names reside in the smaller end of the small-cap universe, an area that often receives less Wall Street coverage. According to Bergson, that's where some of the biggest gains reside.

Managing liquidity is also a big factor in the small-cap world.

"Smaller companies are less liquid, so trading them can have a bigger impact on their stock price," Ryer says. "We don't want to move the market with our trades."

On the contrary, Bergson and Ryer wait patiently for motivated buyers or sellers to move on stocks they'd like to sell or buy for the Fund.

"We're opportunistic," says Ryer. "When we identify a large holder who needs to trade, we can take the other side on more favorable terms."

Commitment to discipline
Shareholders needn't worry that they're getting anything other than a small-cap core fund. Capitalization, style and sector weightings are kept close to the Fund's Russell 2000 benchmark. (See the Fund fact sheet for more details.)

"We take our core mandate seriously," says Bergson. "We don't want to veer the portfolio toward either value or growth or any particular industry segment. We want it to be style neutral, because that's what our shareholders want."

Ultimately, the Fund's managers strive to generate a favorable risk-adjusted return in seeking to achieve the Fund's objective of long-term capital appreciation, a characteristic often associated with the small-cap sector of the market. "We only want to take risk where we think we are going to get compensated," says Bergson.

And that's an approach that makes sense in any economic environment.

Past performance is no guarantee of future results.

Equity Risk: Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.

Small Cap Risk: Small-capitalization funds typically carry additional risks since smaller companies generally have a higher risk of failure. Their stocks are subject to a greater degree of volatility, trade in lower volume and may be less liquid.

 
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