Does investing in a mediocre company with the hope that it’s poised to perform better sound like a market-beating strategy? That seemingly unambitious approach has been the key to value-oriented Delafield Fund’s (DEFIX) enviable long-term gains. Since the fund’s inception in late 1993, its portfolio has gained over 809 percent, more than double the market’s return.

Of course, finding earnings power in such lackluster fare is extraordinarily difficult. Fortunately, both of Delafield’s portfolio managers have considerable expertise: They’ve been working together for over 30 years and have helmed the fund since its launch. Their efforts are bolstered by a small team of analysts, all of whom are generalists, which helps them compare companies across different industries.

Their investment process starts by screening stocks that have hit new 52-week lows. They then mine those results for potential catalysts for a turnaround, such as an imminent change in management, a divestiture of an underperforming operation, or an acquisition that will boost growth.

Although the fund has the freedom to invest across the market capitalization spectrum, it tends to focus on smaller companies because they’re less widely followed by Wall Street analysts. That gives management an informational edge, so they’re more likely to find a compelling value that’s fallen by the wayside.

Almost 87 percent of the fund’s equity allocation was invested in small- and mid-cap stocks at yearend, including a substantial 17 percent in micro-caps—companies with market caps below $300 million. Such stocks typically incur greater volatility than the broad market, and the fund’s standard deviation of returns is sharply higher than the S&P 500 and even slightly greater than the small-cap Russell 2000 index.

The fund’s higher risk means that it usually falls a bit more than the market during downturns, though in the bear market year of 2008 its loss only exceeded the S&P by a fraction of a point. But during bullish periods, the fund’s portfolio often leads the market by a significant margin, hence its superior long-term returns.

Management’s approach to mitigating risk goes beyond merely being skinflints. They maintain a sizable cash position (recently about 20 percent of assets) that reflects not just their economic outlook, but also their discipline to preserve cash until they discover stocks that meet their criteria.

Tempting Turnarounds

Even so, they’ve still been adding new holdings to the portfolio. During the fourth quarter, zinc producer Horsehead Holding Corp (NSDQ: ZINC) hit a 52-week low, which the fund used as an opportunity to establish a pilot position in the stock. Horsehead’s management expects its new $400 million zinc plant to boost earnings substantially once it commences production later this year.

Among existing holdings, the fund more than doubled its position last quarter in specialty metals manufacturer Carpenter Technology Corp (NYSE: CRS), as its shares fell toward their lows for the year. The company’s earnings are expected to jump as it continues its shift toward making higher-margin products.

Any uncertainty about the fund’s strategy should be assuaged by the fact that each manager has more than $1 million invested alongside shareholders. Still, Delafield is best suited for aggressive investors, who are willing to give its contrarian plays time to rebound.