Ohio manager employs small-cap model for OPERS

When he was director of investments for a Cincinnati company’s pension fund in the early ‘90s, one of Len Haussler’s primary roles was to oversee the plan’s external managers.

He recalls a particular manager not producing returns that were on target.

“They were so bad we thought we could do it ourselves,” he said.

That wasn’t allowed at the time, though, so Haussler and his wife, Jakki, eventually left the company and founded their own investment firm. Opus Capital Management started with $12 million in assets under management in 1998 and has since grown to manage $1.75 billion for public plans, corporate pension plans, foundations and endowments.

The Ohio Public Employees Retirement System recently hired Opus to oversee a $100 million small-cap portfolio as part of its external manager program.

Jakki Haussler

“We’re absolutely thrilled at the opportunity to work with OPERS and in the state of Ohio as well,” said Jakki Haussler, Opus Capital’s chief executive.

Opus Capital is one of 25 external equity managers OPERS employs and an example of how keeping business in state is important. While Opus was hired as a small cap manager, OPERS also recently committed $400 million to 10 Ohio-qualified and minority-owned emerging managers. Many of them are headquartered in Ohio.

In total, OPERS invests more than $1 billion with companies headquartered in the Buckeye State.

“From the investment in securities of Ohio-based companies, to fees we pay to Ohio investment managers and brokers, to direct investment in the companies that do business every day here, OPERS is a vital contributor to the Ohio economy,” said OPERS Chief Investment Officer John Lane.

OPERS’ current target for small-cap and mid-cap equities is 7 percent of the $70.4 billion fund. External managers oversee $1.1 billion of the $1.6 billion that OPERS currently has allocated to small-cap equities.

Active managers, or ones who don’t strictly follow an index, can have an advantage in inefficient markets, such as small-cap stocks, in which information isn’t always freely and widely available.

Len Haussler

“We think that’s quite an advantage for us,” Len Haussler said. “If you look at the large-cap universe, active managers vs. the S&P 500, you’ll see it’s rare for active, large-cap managers to outperform over a long period of time. The odds aren’t with you. The S&P 500 wins 70 to 80 percent of the time.

“But information on small-cap companies is much harder to come by. You do your own research. Sometimes the market gets it wrong, and the valuation on smaller companies is out of whack on their intrinsic value. We take advantage of that.”

“Small cap” funds often are defined by the Russell 2000, the universe of equities after the first 1,000 largest companies. Len Haussler said Opus typically considers only companies with a market capitalization ranging from $250 million to $2.5 billion. Companies are moved off the list once they approach $5 billion in market cap.

“We want to remain true to our school, not get into mid cap or large cap stocks,” Len Haussler said.

Opus Capital’s expertise is centered on a small-cap value equity model that during a typical year holds the stocks of 55 to 75 companies. It turns over 40 percent to 60 percent of the shares annually.

Opus Capital will oversee a separately managed account for OPERS that is not commingled with other clients’ money.

Haussler said his firm defines value based on price-earnings, price-book and price to cash flow, but that above all it looks for “undervalued companies with above-average growth but not sacrificing on quality.”

“We’re always looking for those companies that at least have earnings,” he said, “not a company that has lost money. In the financial crisis, a lot of companies had write offs and lost money. Typically we’re looking for companies generating earnings, but we also are serious about buying lower-valuation companies.”

Haussler said the Opus Capital small-cap value portfolio has earned an average return of 8.8 percent for the past decade, compared to 5.6 percent for the Russell 2000.

Jakki Haussler said this is the first time it has worked for one of the five state pension funds.

“We have relationships with a lot of consultants, but we love the opportunity to go direct,” she said. “The investment team at OPERS is outstanding.”