It takes conviction to successfully run a concentrated portfolio, especially one that focuses on smaller companies. And the management team behind Brown Capital Management Small Company (BCSIX) has no shortage of fortitude when it comes to enduring the volatility that’s characteristic of small-cap stocks. Indeed, roughly a third of the fund’s 37 holdings have been in the portfolio for nearly a decade or longer.

Although BCSIX is far riskier than the broad market, it typically incurs slightly less volatility than the small-cap Russell 2000 index. And long-term investors have been amply rewarded for tolerating occasional weakness. Over the past decade, the fund gained more than 257 percent, almost double the market’s return. In fact, the fund’s performance has been stellar over numerous time periods, earning it a top-decile ranking in Morningstar’s small-cap growth category for the trailing five-, 10- and 15-year periods.

Brown Capital’s team-oriented approach ensures that management has both expertise and longevity. This fund’s four seasoned portfolio managers have been working together for over a decade, while the two lead managers have been at the helm since the fund’s 1992 inception.

Management’s value-oriented strategy for selecting growth stocks is best summarized as “growth at a reasonable price.” Before arriving at a stock’s valuation, they subject each idea to rigorous fundamental analysis to assess a company’s prospects for long-term growth, the quality of its executive team and their ability to defend its niche against competitors.

When it comes to sector allocations, they’re not constrained by concerns about diversification. In fact, technology and healthcare names dominate the portfolio, with current weightings around 68 percent and 19 percent, respectively.

Biotech Buys

Hematology and biotech products manufacturer Techne Corp (NSDQ: TECH) has been in the portfolio for nearly 20 years and is among the fund’s larger positions. Despite lackluster returns in recent years due to slowing profit growth, the stock has gained 14.6 percent annually over the past 15 years. Late last year, management boosted its holdings in the stock by about 7 percent.

Though biopharmaceutical firm Incyte Corp (NSDQ: INCY) has yet to turn a profit, that hasn’t stopped its stock from gaining an incredible 23.2 percent annualized over the past decade. The company’s losses narrowed last year thanks to the launch of its small-molecule drug Jakafi, the first FDA-approved treatment for myelofibrosis. The stock has been in the portfolio since 1997, and management recently more than doubled its position.

In addition to small-cap stocks, the fund has a substantial 14 percent allocation to micro-caps. That raises one potential concern for such a concentrated portfolio. The fund’s superior returns have attracted sizable inflows, and that could make it increasingly difficult to execute its strategy, particularly given the limited liquidity of smaller stocks.

The fund is among the largest shareholders for many of its positions, owning an average of 5 percent of shares outstanding for each of its top holdings. Fortunately, management is mindful of this pitfall and has shuttered the fund to new investors twice during the past 10 years, with its latest reopening this past September.

Nevertheless, the fund’s strong sector focus offers an additional inducement for aggressive investors seeking exposure to small-cap stocks with outsize growth potential.