Portfolio Manager Interview

Interview with Pax World Small Cap Fund manager Nathan Moser

Nathan, perhaps we can begin by asking you to tell us about your investing background in general.
Well, I’ll start personally. I grew up in New Jersey. My father was a stockbroker for more than 25 years. So investing was something that, from early on, was a fundamental part of my life. I can well remember discussing investing at length with my family. I went to Babson College knowing that I wanted to go into the investment business. From there, I went on to State Street Research and John Hancock and worked my way up covering consumer discretionary, technology, business services and healthcare. I then joined Citizens Funds, a socially responsible mutual fund company that has recently been sold, to cover healthcare. Eventually, I was named co-portfolio manager of the Citizens Small Cap Growth Fund, and I joined Pax earlier this year.

What prompted you to join Pax?
I first met Joe Keefe (Pax World President and CEO) and members of the investment team in 2006, and I was excited by their transition from socially responsible to sustainable investing and by what I perceived as the relevance and importance of their investment philosophy. When Joe mentioned to me that Pax was broadening its product portfolio including launching a small cap fund, I thought, what a perfect fit. The opportunity to manage a small cap fund from its inception and work in an intellectually stimulating environment makes this experience even more rewarding.

How about telling us about your specific investing style relative to the world of small cap stocks?
My investment philosophy focuses on buying high quality companies for reasonable prices. I prefer businesses with strong management teams, high levels of profitability and improving outlooks. Shareholders can expect our portfolio’s overall valuation to be less expensive relative to its benchmark. I believe it will have a better growth and quality profile. I feel my overall style should help mitigate some of the stock-specific risk associated with small cap investing. I also believe in managing a rather concentrated portfolio of between 50 – 60 companies. This level adequately diversifies the portfolio and allows strong performing stocks to have a meaningful impact on overall portfolio performance.

How does environmental, social and governance (ESG) research fit into your investment process?
The integration of ESG criteria with financial analysis is a real strength of Pax. I’m confident that the increased analytical scrutiny by our ESG research team aids me in finding better-managed companies.

Having the research team in-house – I sit just feet away from them – is very valuable. They’re very good at pointing out risk whether it’s at the industry level or on a stock-specific basis, Moreover, their qualitative work is helpful to me as I seek to identify companies with a positive future ahead of them. When I submit a company to be screened by the research team, the report that I get back is very broad; it reaches deep within the company on the qualitative side. That’s really a helpful aspect in my overall investing process.

This seems to lead to an obvious question. What makes the Pax World Small Cap Fund different from other small-cap funds?
Besides incorporating ESG into the analysis process, which is an obvious differentiator, the fund has the ability to invest a significant percentage of assets in international markets. This will afford me the opportunity to find the best potential values on a worldwide basis while further diversifying. If 15-20% of the portfolio is invested internationally, that gives me diversification benefits; it gives me the chance to go look for growth internationally while things domestically may not yield that many ideas. It’s very exciting to have that hunting license to look worldwide for the best small-cap investments.

What are some of the challenges/opportunities of managing a small cap fund in today’s volatile market environment?
The stock market has been volatile recently due to the impact of the housing crisis on the overall economy. As investors look for relative safe havens, they’ve sold small cap stocks and rotated into larger cap names. This has created numerous opportunities with respect to valuation and negative sentiment. While some companies deserve to trade at depressed valuations due to deteriorating fundamentals, many do not. I believe this is an excellent time to be launching a small cap fund and view this as a great stock pickers market.

Would you talk about some of the broad themes you’ll be focusing on?
Clearly one of the themes is alternative energy. That’s obviously an area I’m looking closely at. Healthcare IT is another area, particularly as it relates to healthcare cost containment. What I’m trying to find are solutions to problems we have today. So whether it’s skyrocketing energy costs or healthcare cost inflation, companies that are focused on providing solutions to today’s problems have the chance to be tremendous growth companies of the future.

If I can find tomorrow’s leaders early on, when they’re still small cap companies, my shareholders will get to experience their significant growth potential. Because we can all remember back – at one point, some of the greatest companies were small, little growth stocks.

Do you try to meet face-to-face with management teams of many of the companies you are interested in investing in?
Whenever possible, I do prefer to meet with management teams as part of the fundamental analysis process. I believe it’s important to ask executives the tough questions many investors won’t ask in public settings. They may not answer the question directly, but sometimes just their body language or temperament provides important information. I also believe it’s valuable to hear executives discuss their business strategy, risk factors and competitors. Honestly, some of my best ideas have come about from hearing a management team discuss an up and coming competitor.

Does being here in Portsmouth, far from Wall Street, make your job more difficult?
Just the opposite, actually. Whether you’re based in Portsmouth, Los Angeles, Boston or New York, the analytical process is still the same – meeting with companies, talking to analysts, talking to customers. And I actually find that being in Portsmouth is an advantage from this standpoint: I’m not distracted by all the noise, whether it be from the trading floor or from my peers.

Investments in small capitalization companies present a greater risk of loss than investments in large companies due to greater volatility and less liquidity.