Here’s how we rebalanced the Crabtree Technology model

Sometimes as an investment advisor, you have to be disciplined about…your discipline. Let me explain.

At Crabtree Asset Management, our investment discipline involves running our quantitative model every three months, and then using the results of the model to re-balance the Crabtree Technology portfolio on Covestor. These re-balancings occur generally in the middle of February, May, August and November. And as a reminder, we use our quantitative model to help us locate companies that generate cash flow, hold on to or expand their market share, and execute against their own as well as Wall Street’s expectations.

However, when we ran our quantitative model on August 17, we weren’t very happy with the results. Unusually, we had a lot of missing data. We believe this was caused by delays further “upstream,” as our data sources get their data in turn from SEC filings. We’re not sure why there were delays in pushing updated information down to our sources, but it happened nonetheless.

Don’t get me wrong: our software and our program ran just fine. And we had a model with which to work. But because of the cross-checking we always do, we knew there were issues of data quality. So we had to be disciplined about … our discipline, and check all the data by hand. This is arduous, because our quant model works on a hand-built database of over 1100 technology companies.

So we took our time, cleaned up the data, and by the first week of September, we had a high-quality quantitative model with 77 qualifying companies. On September 5, we performed our quarterly re-balance of the Crabtree Technolgy Model.

In the re-balance, we sold our positions in Astronics (ATRO), Ariba (ARBA), British Telecom (BT), Calix (CALX), Electronics for Imaging (EFII), GSI Group (GSIG), Hickory Technology (HTCO), Hexcel (HXL), Nippon Telephone (JP:9432),, Progress Software (PRGS) and Red Hat (RHT).

To replace these positions, as well as the our holding in Zillow (Z) that we sold in early August, we purchased 2% positions in EnerNOC (ENOC), CareFusion (CFN), eHealth (EHTH), R. R. Donnelly (RRD), Bio-Reference Laboratories (BRLI), Cynosure (CYNO), Pericom Semiconductor (PSEM), ReachLocal (RLOC),  and MTS Systems (MTSC).

Additionally, we trimmed seven other holdings, including Anika Therapeutics (ANIK), CalAmp (CAMP), Cambrex (CBM), NIC Corp. (EGOV), GenCorp (GY), Medidata Solutions (MDSO) and MAXIMUS (MMS). These positions had grown, but because they all still qualify for inclusion in our model, we merely trimmed them back to their original 2%-of-the-portfolio size.

We’re very happy with the updated Technolgy Model, and as if to celebrate, on September 12, the private equity firm Thoma Bravo offered to take new Crabtree holding Mediware Info Systems (MEDW) private for $22/share in cash, a 40% premium over the previous day’s closing price. This marks the eleventh time since the Crabtree Technolgy Model’s inception on March 31, 2009 that a Crabtree holding has received a takeout offer. During October, we will likely replace Mediware with another company from our quantitative model.

And while not every Crabtree holding performed quite as well as Mediware in September, the Crabtree Technolgy Model performed solidly, rising 3.8%, net of advisory fees. By comparison, the Nasdaq 100 (NDX) rose 1.0%, and the S&P 500 (SPX) rose 2.4% during the month of September. Our internal benchmark, the Merrill Lynch Technology 100 (MLO) rose 0.8%.

September also marked the one-year anniversary of our affiliation with Covestor. And as I type this in early October, our 365-day return of 41.4% as of October 3, 2012 ranks the Crabtree Technology model 17th out of 165 Covestor models in one-year performance.

While we’re proud of that performance, we’re prouder still of our information ratio, which Covestor calculates as 0.91 versus the Nasdaq 100 benchmark. The information ratio is a widely accepted measure of risk-adjusted return, and an IR value greater than 0.5 is seen by many as being in the top quartile of fund managers for a particular style against a relevant benchmark.

But no victory laps for us. We have been investing with our disciplined style for many years and expect to be investing this way for many more, along with our valued partner, Covestor. In investing, one year is just a blink of an eye.

The index comparisons herein are provided for informational purposes only and should not be used as the basis for making an investment decision. There are significant differences between client accounts and the indices referenced including, but not limited to, risk profile, liquidity, volatility and asset composition. The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry, among other factors. The NASDAQ-100 Index includes 100 of the largest domestic and international non-financial securities listed on The Nasdaq Stock Market based on market capitalization. Merrill Lynch 100 Technology Index (MLO) is an equal-dollar weighted index of 100 stocks designed to measure the performance of a cross section of large, actively traded technology stocks and ADRs.

The investments discussed are held in client accounts as of September 30, 2012. These investments may or may not be currently held in client accounts.The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.

Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.

Author profile

Barry Randall
Barry Randall
Crabtree Asset Management invests in growing technology companies. Barry Randall is the firm's founder and chief investment officer. He has more than 20 years of professional investing experience.

Barry spent five years as a technology stock analyst and 10 more years managing mutual funds that focused on small-cap and technology stocks. He has experience managing mutual funds and separately managed accounts as large as $650 million. Prior to earning his MBA in 1993, he spent six years as a professional computer programmer.

Barry earned a Wall Street Journal 'Category King' award for his co-management of a small cap mutual fund in 2006.

As of September 2017, Morningstar rated the Crabtree Multi-Cap Technology composite, of which the strategy offered at Covestor is a component, as having Four Stars for trailing 3-year, trailing 5-year and Overall

Barry has been quoted regularly in Forbes, US News & World Report, and E-Commerce Times. He has appeared on CNBC, Bloomberg TV and Fox Business News.

Crabtree Asset Management LLC was founded in 2008 and is headquartered in Saint Paul, Minnesota.