Morningstar - Q3 2022 - 62

Investors
Looking Ahead
Nicholas Investment Partners is focused
on the future.
UNDISCOVERED MANAGER
Laura Lallos
Undiscovered Manager is a regular profile
of a noteworthy strategy that hasn't been rated
by Morningstar Research Services' analysts.
Nicholas Investment Partners' roots predate
the firm's 2006 founding by many years, but the
focus is something new.
Catherine Nicholas started her investment career
as a small-cap stock analyst in 1987 at NicholasApplegate
Capital Management. She went
on to become the portfolio manager overseeing
the firm's domestic-equity strategies and
helping build its international and emergingmarkets
efforts. When the firm was sold to Allianz
Global Investors in 2001, it had grown to
over $40 billion in assets under management.
In 2006, after her noncompete agreement
had expired, she launched Nicholas Investment
Partners, which is headquartered in a
converted equestrian center that was adjacent
to Nicholas' family property in San Diego.
" The intent of this firm is different, " Nicholas
says. " At Nicholas-Applegate, it was the bigger,
the better. The more products the better.
This is a small boutique firm focused on small- and
mid-cap stocks where we think there is a lot
of alpha to be generated. "
To serve this interest, the firm plans to limit
capacity for the flagship U.S. small-cap growth
strategy at $2 billion; it's currently approaching
$400 million. It was available only to institutional
investors until 2019, when the firm launched a
62
Morningstar Q3 2022
mutual fund with a $5,000 minimum, Nicholas
Partners Small Cap Growth NPSGX. The
fund, which lands in the small-growth Morningstar
Category, hit its three-year mark in January
and has a 4-star Morningstar Rating as of June 30
(as does the separate account composite, which
has a record extending back to 2007).
Nicholas didn't start from scratch when
starting over. The partners include five former
Nicholas-Applegate colleagues, including
her husband, Art Nicholas, who serves as an
advisor to the firm. " It's more than just
a working relationship. We know everybody's
families, " she says.
Partner and portfolio manager John Wylie first
met Catherine Nicholas when he, too, joined
Nicholas-Applegate in 1987: " We sat right next to
each other, literally six feet away. "
Wylie ran convertibles strategies there and
now runs an institutional convertibles strategy at
Nicholas Investment Partners, as well as the
small-growth strategy. (He notes that there is a
large overlap of companies in the convertible
and small-cap universes.) He's been with Nicholas
Investment Partners since the beginning.
" Catherine and I go back to the late '80s. We lived
through the market correction and '93-'94 together,
we saw Long-Term Capital together, the 2000
dot-com bubble, " Wylie says of his partnership
with Nicholas. " When I had the opportunity to join
Nicholas Investment Partners, I jumped at it
because I've always loved working with Catherine. "
Strict Parameters
" The philosophy goes back over 30 years, " Nicholas
says. " Basically, we are looking for companies
where there's something positive happening
at the company level that will lead to an
acceleration of revenues and earnings but is not
priced into the market. "
After identifying an investment thesis, the team
does due diligence on the company to ensure
that growth will be supported by solid financials,
strong management, and durable business models.
They buy only when the stock price is right,
as indicated by factors such as positive relative
strength, liquidity, and other market sentiments.
Nicholas emphasizes that selling is just as
important to the process; they sell when a stock
no longer meets their criteria or the growth
catalyst has played out, or when a better prospect
warrants a spot in the portfolio.
Nicholas singles out specialty retailer Boot Barn
BOOT, added to the portfolio in 2021, which
has benefited from an uptick in Western lifestyle
wear. " This is a highly fragmented mom-andpop
niche, and this company has at least 3 times
as many stores as their direct competitors
and a long runway to open up more. Their sales
have been much better than expected, and what's
smart is they have their own private label-
they work with country-western musicians and put
their labels on the shirt. "
She notes that a strong management team has
been able to execute even in a challenging
environment for retailers-indeed, the stock is up
for the year through June.
Wylie points to Switch SWCH, a technology
company that operates large-scale data centers,
which they added to the portfolio early this year
after following it for some time.
" It's a rapidly growing market, and these
guys are growing revenues at low double digits
with attractive operating margins. They're
very efficient operators, " he says. Research analyst
Tony Pata had vetted management, but the
team was initially put off by an unattractive dual
share class structure. When the company
switched to a more shareholder-friendly single
share class, they were ready to buy. The
investment has been a success upon news that
Switch will be acquired.
https://www.morningstar.com/funds/xnas/npsgx/quote https://www.morningstar.com/funds/xnas/npsgx/quote https://www.morningstar.com/authors/44/laura-lallos https://www.morningstar.com/stocks/xnys/boot/quote https://www.morningstar.com/stocks/xnys/boot/quote https://www.morningstar.com/stocks/xnys/swch/quote
Morningstar - Q3 2022

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