For a mutual fund with a strong track record, Nicholas Equity Income Fund is not particularly large. And its manager is fine with that.
"I like it being smaller," says Albert O. Nicholas, whose fund has $132 million under management. "It's much more maneuverable."
Nicholas Equity Income I, run by Nicholas Co. Inc. of Milwaukee, has bested its peers during the past 12 months, posting a 20.96% return as compared to a 14.9% average for funds in its category, according to Lipper Inc.
For the last three years, its 9.58% return is far better than the 0.41% average loss of its peers. It has led its category the last five years, with a 9.12% return, compared to 2.89%. And for 10 years, its 7.4% return has outshone the 3.92% average of its rivals.
Nicholas Equity Income's turnover, 36%, is modest, as is its expense ratio of 90 basis points. Part of its return comes from dividends; the portfolio currently yields 1.96%.
The fund is not covered by many analysts. But Morningstar Inc. senior analyst William Rocco, who follows another portfolio managed by Nicholas, calls him "a good, cautious investor."
That is the same way Nicholas describes his firm's overall approach. "We really worry about downside risk," he said. "We don't like the agony of lost numbers."
Nicholas Co. offers six mutual funds in addition to separately managed accounts. It is led by a father-and-son team: Albert "Ab" Nicholas is the chairman and chief executive, and son David Nicholas is chief investment officer.
The Equity Income fund was started in 1993 with the objective of finding stocks that produce high dividend income while providing the potential for moderate growth. All the stocks in the portfolio pay dividends, and this has helped cushion Equity Income in declining markets, says Nicholas.
The fund's careful approach paid off in 2008 when it lost just 23%, compared with 37% for the S&P 500 index, including reinvested dividends. A flexible mandate has also helped: Ab Nicholas is able to buy stocks with varying market caps, and he says he has often bought "smaller names" that pay good dividends.
"We tend to buy small- and mid-cap at Nicholas," the father says. "I've always said that small companies can grow faster than larger ones."
He has an eye for unglamorous businesses in the Midwest. National Presto Industries, an electrical appliance maker in Eau Claire, Wis., has a "pristine balance sheet," a price-to-earnings ratio under 15 and a yield, to boot, of 0.70%.
Another homely but lucrative holding is Douglas Dynamics Inc., a snowplow maker in Milwaukee with a current yield of 5.3%. Integris Energy Group, Inc., a Chicago utility company, has a current 5.7% yield.
The fund does not ignore blue-chip stocks, however. Its top holdings include Walgreen Co., AT&T and Altria Group Inc. And it reaches outside its region for modest-sized companies that meet its criteria. It recently added Hudson City Bancorp Inc., obtaining a yield of more than 5% at a reasonable price of 10 times earnings, said Nicholas.
"We respect that they had no credit problems through the crisis," he said, adding that he expects the banking company to raise its dividend fairly soon.
Nicholas Co. lacks a large research team — it has two dedicated analysts, and portfolio managers double as analysts. "We think generalists do much better than trying to be too industry-oriented," said Nicholas. "What counts is how good they are."
As a bottom-up value investor, Nicholas said, he does not obsess over the outlook for the economy and inflation. He says the firm takes a "sanguine" view of the stock market.
"We feel that the trend is up, although we've had two big years in a row," he said. "That usually means some consolidation, so stock-picking becomes even more important."
Nicholas said that he would be comfortable managing as much as $500 million in the Equity Income fund. But the firm is not planning a marketing push to try to reach this total. It does no advertising or promotion, Nicholas noted.
"We run our company on the basis that, if we perform, we'll get money and, if we don't perform, we won't get money," he said.