One on One: "We’re screeningthe very specific criteria for each sector"

Like clockwork, Audrey M.T. Jones checks her voice mail via her cellphone before arriving at her office at Deutsche Asset Management in New York. By the time the market opens, Ms. Jones has watched CNBC, checked her e-mail and talked to her trader.

“It’s a full-time job, managing the portfolios. I guess I am a pioneer, but I hate to be called that,” says Ms. Jones, who has been in asset management for 28 years. For 14 years, she has been a managing director with what is now Deutsche Asset and co-managed the U.S. small- and micro-cap equity group.

Her expertise lies in the energy and transportation industries. Ms. Jones makes sure she involves herself in the companies she handpicks for her portfolio.

She has donned a North Sea survival suit while visiting an oil rig and flown around in helicopters to paper plants. She has yet to go into a coal mine – she heard that it is bad luck for women.

Ms. Jones was part of the Morgan Grenfell small-cap team acquired by Deutsche Bank AG almost 10 years ago. She and her portfolio managers, John Callaghan and Doris Klug, have an average of 22 years of portfolio management experience with a focus on small-cap investing.

“If you are doing what you really like to do, then it’s fun. That’s the key. I really enjoy managing the money and finding the stocks.

“The one thing I’ve learned is that you have to be multitasking in this business,” she says.

Ms. Jones thinks the reason for the underperformance of the small-cap sector can be attributed to lack of attention.

“People have looked for liquidity and large-cap stocks. We have a real opportunity to find companies at very attractive valuations,” she says.

Q What screening method do you use for small-caps?

A We define small-cap as the bottom 20% of the U.S. investible universe. It’s a very large universe of over 6,000 companies. We take the bottom 20% and divide that universe by economic sectors so each one of the three managers has responsibility for their sector.

What we believe is important here is that each one of us uses specific criteria for our own sector.

Rather than screen at the revenue line or at the earnings line, we’re screening the very specific criteria for each sector. At banks, I would be screening non-performing loans. For energy, I screen asset values and production.

Q When do you set a target price on a stock?

A I really believe it’s important to set your target price on a stock at time of purchase so it’s not going to be caught up in the euphoria – decide why you have a target price so we have a rationale for it.

The key there is whether it’s a market-share rationale or valuation – really know what it is so when you buy the stock, you have that target price. All that comes together at the individual-stock level.

Q What is your strategy for the technology sector?

A In the last three years, we have done a good job of either overweighting or underweighting technology at the appropriate time. We underweighted it and moved the money into credit-sensitive in the second half of last year. It really takes a cohesive team to bring it together.

It really starts at the stock selection, and it ends at the stock selection, because all the rest is almost a residual. Cash is a residual; it’s really generated idea by an idea.

All three managers have dedicated their careers to small-cap investing. That I think is unique because in many firms, managers gravitate to large-cap.

Q Who are the leaders in the energy sector?

A Some of the companies that we have benefited very well from were BJ Services [Co.] and Devon Energy [Corp.] Both of these companies were successful companies and tied to the U.S. natural gas industry.

Clearly last year and today, what we are seeing is the very strong demand for natural gas.

We were overweighted in energy all year. We anticipated the improvement in the stocks throughout the year.

Q What is your investment strategy?

A We produce a diversified portfolio across all economic sectors, and that is very important.

Clearly, we are not a technology fund or a health-care fund. I call it a portfolio for all seasons. We basically have exposure across the board.

Q What kind of approach do you use in a volatile market?

A With the market in the last year, there has been volatility and reversals so often. When there isn’t a very good sense of direction, then you look at your benchmark and take less risks versus your benchmark. So you keep your exposure more related to the benchmark.

What we’ve done is always choose the best companies in each area and then only overweight those that you really have high convictions of.

Q Is that the same process you use for the micro-cap fund?

A We use the same process and the same team for the micro-cap fund.

What is really exciting to us is that we could really add value there because many of the companies are under very entrepreneurial management. They are startups.

We really have a two-way dialogue with corporate management because they are not sophisticated with Wall Street ways, but we also talk to a lot of their competitors and companies that are larger than them.

Q Was there a stock that surprised you last year?

A A good example of a micro-cap company last year was Horizon Offshore [Inc.], which builds infrastructure in the offshore oil market. It went from $5 to $19. Those are the kind you want to find early.

You knew it had a strong balance sheet and a key market in the Gulf of Mexico, and it was positioning itself against a larger company that was taking market share away from a competitor.

That is the kind of company we are looking for in all areas – small companies that will do very well.

Q How would you rate your funds’ performance?

A We have done really well. We think there has been effective sector allocation and, importantly, stock selection and overweighting the winners in each sector that has done quite well.

Q What were the attitudes of investors during the election?

A We didn’t see a lot of shifts. What you did have was a lot of volatility in the marketplace and no clear leadership in the fourth quarter. The way we’ve explained it is that the three Es became the four Es.

There were earnings concerns, concerns on the euro and energy concerns. It became the four Es with the election being in dispute. The election was a very big concern, and the economy began to slow.

Q What are the advantages of investing in small-cap stocks?

A In the small-cap universe we have 6,000 companies. In large-cap you are choosing one out of two. You are making a decision whether to buy BP or Exxon almost. With small-cap, you’re making a decision to buy one out of 60 stocks.

Q What’s your outlook for the stock market?

A We really believe that small-cap stocks are very attractive. We really believe that the valuations in small-cap relative to large-cap are very favorable in any of the valuation metrics.

The Fed will remain accommodative. With an accommodative Fed and liquidity in the system, we will have a favorable outlook for small-cap stocks.

SNAP SHOT

Audrey M.T. Jones, 52, managing director at Deutsche Asset Management in New York and co-manager of its U.S. small- and micro-cap equity group

Education: bachelor’s in business administration, Pace University in New York

Deutsche Micro Cap Inst (assets, $28.63 million): 3-month return,

-18.59%; 1-year, 3.22%; 3-year, 24.11%

Deutsche Small Cap Inv (assets, $257.68 million): 3-month, -0.98%; 1-yr, 10.28%; 3-yr, 21.02%; 5-yr, 15.44%

Morningstar small growth funds: 3-month, -15.34%; 1-yr, -5.71%; 3-yr, 13.77%; 5-yr, 14.57%

Assets as of Dec. 31; periods over one year annualized

Source: Morningstar