Mr. Juvonen: Downtown Associates has been in business for over 35 years, investing with a single and consistent investment discipline. We are an SEC-registered firm, mostly operating through profit-sharing partnerships. We have a concentrated portfolio of 10 to 15 small-cap growth names bought for long-term appreciation, but we also adhere to an extreme value discipline in order to find those growth stocks at a very inexpensive price; it's a Best Ideas portfolio only. In addition, we do on occasion hedge the portfolio to take some of the volatility and downside risk out of it.
TWST: Tell us how your investment fared over the past 12 months, and how you were able to deal with the volatility in the market at that time.
Mr. Juvonen: Let me say several things about that. First, volatility is our friend, not an enemy, given our investment strategy. Also because we are looking for what we would consider to be great growth companies at extreme value, we accept the fact that our target investments have stumbled or had problems of one kind or another, because certainly the best small-growth companies are not going to sell at extreme value prices unless there are problems going on. Even though the last year or two was a great time for us to get extreme value, we still are always interested in finding companies whose value extremes are greater than many people would be content with. We are looking for those situations that have gotten to the point of disinterest or disgust by other investors. Our discipline in the last year or two has also caused us to hedge, mostly with exchange-traded funds, to protect the portfolio while giving us extreme liquidity and flexibility on the hedging side. We were able to do very well last year on the downside because of that hedging, and also because the hedging produces cash if the market goes down. Therefore, we were able to continue to put money into new ideas as the market got cheaper and cheaper. And of course when we get to a period like this past March, if we are looking at companies which have had some problems and are also being driven down by the market, we had opportunities to buy many excellent companies at net tangible book value per share, which is usually not available with a good growth company. On balance, it all worked out very well.
Tickers included in this excerpt: CTRN, EGOV, FARO
For more information call (212) 952 7433. The Wall Street Transcript does not endorse any of the comments made by interviewees, and does not make stock recommendations.