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March 1, 2012

In the Conversation

By Michael Scotti

It's the close proximity of portfolio management and trading at Heartland Advisors that makes the investment process tick for the Milwaukee-based manager with $5.2 billion in equities. Three traders and 14 portfolio managers and analysts work side by side in an open environment: The traders are sandwiched between the portfolio management teams. They are within earshot of each other.

Josh Van Dreel

Neither side misses much. Traders know what portfolio managers want to buy or sell, and portfolio managers hear what's transpiring on the trading desk. This is a huge advantage, says Josh Van Dreel, an eight-year trading veteran.

"We can hear them talking about ideas that they have, so we can gauge what names they might have interest in." Van Dreel said. "It makes us so much more efficient. We're right in the middle of all of them."

He added: "It's really important to be part of the conversation." The three traders---Van Dreel and veteran traders Kevin Clark and Matt Miner, who heads the desk---also attend weekly research meetings, so they know potential buys or sells.

Heartland is a fundamental small-cap investor. It also has some micro caps and about $400 million in large caps, Van Dreel said. The company has three domestic value funds and one fledgling international fund of about $20 million. It also favors a concentrated portfolio. "It is not rare for us to be a top 10 holder in a name," he said.

Big positions are one reason block trades can make a difference in performance. The firm often uses traditional third-market firms. It trades with both JonesTrading and Cantor Fitzgerald. Heartland also uses Knight's market-making capability and will have the wholesaler work tough orders.

"In the small-cap space, their order flow is every bit as valuable as research," Van Dreel said. "Many small-cap names trade 'by appointment' only, so it can be very helpful when negotiating a block of stock to have the PMs so close to you."

All told, about 84 percent of the firm's flow goes through its high-touch research brokers, while 3 percent goes through execution-only shops. The firm rarely uses client commission arrangements, but does have traditional soft-dollar agreements. About 2 percent is done in crossing nets like Liquidnet, BlockCross, BIDS and Aqua, and 11 percent is self-traded through direct market access and algorithms.

Being part of an interactive investment team that delivers "positive performance to investors" is the most rewarding aspect of the job, Van Dreel said. That, however, is not without its stress in the attempt to capture alpha.

"Trading is high-pressure, but the pressure stems from not wanting to let your PM down," Van Dreel said. "I don't think it is the market that makes it high-pressure; it is the constant desire to make your PM's proud and not let him down-that's the pressure."


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