LIPPER AWARDS-Buffalo fund wrangles small-caps far from Wall Street

By David Randall

NEW YORK, March 21 (Reuters) - Some of the best fund managers you've never heard of sit in a non-descript office park in Shawnee Mission, Kansas, 1,200 miles from Wall Street.

There, John Bichelmeyer heads the five-member team behind the Buffalo Emerging Opportunities Fund. Few outfits have performed better since the bull market began in March of 2009. An investor who put his money into the small-cap fund that month would have gained an average 42.1 percent per year for the next five years, a performance nearly 15 percentage points ahead of the benchmark Russell 2000 index of small companies.

That track record led to a 2014 U.S. Lipper Award for small growth funds.

Bichelmeyer has done it largely by focusing on the smallest of publicly traded companies, known as micro-caps. The fund changed its name from the Buffalo Micro Cap fund in June last year, and the average market-cap among the 61 stocks in its portfolio is just $874 million, according to Lipper data.

Bichelmeyer looks for "premier, early-stage growth companies" in the technology, healthcare, financial and consumer sectors that stand to benefit from one or more of roughly 25 long-term trends, ranging from the growth of cloud-based computing to higher spending on pet care. His team expects all of these trends to last for the next several years.

Trend-spotting is only the first step - a way to narrow down possibly promising companies with under $1 billion in market value. After that, the team focuses on names that have above-average revenue growth, higher returns on capital, the potential for high margins, and that can either fund themselves with their free cash flow or are close to it. The goal is to find a company that can grow by at least double the rate of the economy and do it with a clean balance sheet.

Bichelmeyer's outsized gains have brought a flood of new assets into the $581 million fund, which announced a soft close in November after passing $475 million in assets. It is still open to existing investors and those who have access through a 401(k) plan or whose advisors already invest in the fund.

Investors in Buffalo Emerging Opportunities pay an annual fee of $1.50 per $100 invested, which Lipper considers high. The fund does not pay a dividend.

The fund's biggest bets are on technology, with roughly 40 percent of the portfolio spread out among companies that include high-tech manufacturing software maker PDF Solutions Inc , tax-advantaged spending account facilitator WageWorks Inc, and medical information provider Omnicell Inc .

Bichelmeyer typically holds a company for 3 to 5 years until it either morphs into a mid-cap stock or its business growth slows significantly. Holding a stock that looks expensive doesn't faze him.

"We try to find good businesses first and then focus on valuation second," he said. "If you have the right business and continue to execute, then objects in motion tend to stay in motion."

PATIENCE PAYS

When Bichelmeyer buys a company, however, he's willing to wait for a price he likes. The fund recently added veterinary products company Abaxis Inc when the stock fell more than 10 percent after losing a major distributor. Abaxis recently signed a new national contract, which will make its revenues "lumpy" for a few quarters, Bichelmeyer said.

"We're taking this air pocket in the results as an opportunity to enter," he added.

Bichelmeyer ended the year with roughly 12 percent of his portfolio in cash, and has been using down days in the market to add to his positions with companies such as specialty retailer Black Diamond Inc, which is expanding into apparel from its core market of boots, helmets and other gear for hikers and skiers. The strength of its brand for hard goods should help it take on competitors such as Patagonia and North Face (owned by conglomerate VF Corp ), Biechelmeyer said.

"Retailers are always looking for something new and innovative to set their stores apart from the pack, and this brand does that at a time when you can find the North Face everywhere," he said.

Black Diamond shares are up 35 percent during the last 52 weeks, but have fallen about 10 percent since the start of January. The $392 million market cap company booked revenues of $238 million last year and turned in a tiny profit for its 2013 fiscal year.

Investors who follow Bichelmeyer's lead should be prepared for the risks of buying into such small companies, said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

"The portfolio manager has done a remarkable job of stock selection, and that's paying off for investors," Rosenbluth said. "But these companies are the ones who have benefited the most overall over the last five years, so it's hard to say that performance can continue." (Reporting by David Randall. Editing by Lauren Young and Andre Grenon)