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NYU MBA Stock-Picking: How to Play Defense With Small Cap and Growth Stocks

Stockpickr Staff

A set of new equity portfolio managers of the New York University Stern School of Business Michael Price Student Investment Fund find themselves in the middle of a very challenging stock market. Meanwhile, their fixed income counterparts are enjoying an "up" bond market (see "For NYU MBA Money Managers, Bond ETFs Top Stocks").

Here's a look at the fund's small cap and growth portfolios.

Stop Losses Save Small Caps From Big Losses

According to Adam Edgell-Bush, co-portfolio manager of the small-cap portfolio, the fund's stop loss policy has really helped keep their stocks holdings from completely tanking. "We used stop losses to protect our down side over the semester break, when the portfolio is not monitored. We got hit on a number of stops as the market turned down, so the strategy worked. As a result, while our benchmark , the iShares Russell 2000 Index Fund IWM, declined 7% in January, our portfolio only declined 3%."

To learn more about stop losses, check out "Stop and Think Before Using Stop Losses."

The small-cap portfolio managers are "playing defense" these days. "We like gaming and tobacco as defensive sectors," Bush explains. "We bought WMS Industries WMS, a gaming machine manufacturer, and we're thinking about acquiring the tobacco business of Loews Corporation LTR after the contemplated spin-off."

"We're also looking at small companies that are globally exposed", says Bush. "Our most recent acquisition was Playboy Enterprises PLA, a globally diversified media company that we thought was undervalued . We also bought Hexcel Corporation HXL due to its global growth in servicing Middle Eastern and Asian airlines and Watts Water Technologies WTS, an infrastructure and energy play."

The Growth Fund Implements Innovative Position Sizing Rules

Henry Sham, co-portfolio manager of the growth fund, says the team now looks for "strong consensus" when buying a new stock, plus "a dollar amount that makes a difference in the portfolio's performance." Sham explains, "Instead of an all-or-none rule, we decided on buying half [of the proposed stock position] if the vote is close -- say 11 to 9 or 12 to 10.

Here is the rule in action: for the growth team, a "full" stock position is $20,000, but if one vote would produce a tie between a buy and a pass, then they might decide to only buy $10,000.worth of shares.

The growth fund was recently "stopped out" of PetSmart PETM, BE Aerospace BEAV and Chicago Bridge and Iron CBI. According to Sham, they now "need to redeploy the cash" from those three sales. "We have 16 [stock] positions currently and consider 20 to be the ideal number," says Sham

Thrilled with the previous growth fund managers' "fantastic" work, Sham and the team think the fund's previous sector bets are worth holding. They continue to oil and natural gas sector, including Transocean RIG, "[Transocean] has an extremely strong backlog of contracts with high day rates, with little wiggle room for customers to get out, says Sham. "Those factors, combined with the upward pressure on oil prices, make us continue to be enthusiastic. We also like Companhia Vale do Rio Doce RIO as a play on global commodities demand."

As of January 31, the growth fund lost 11.48% year-to-date, compared with its benchmark the Russell 1000 Growth Index, which lost 7.8%.