The Small Cap Focus Strategy (“the Strategy”) is a concentrated portfolio that follows a bottom-up, fundamental approach. The Strategy is considered core as it will hold stocks across the entire style spectrum. The Strategy is managed with a team approach. Its portfolio managers are involved in idea generation, fundamental stock analysis, and portfolio assessment, while drawing upon the vast amount of research performed by our U.S. Equity teams.
The Strategy’s investment philosophy is based on three key elements:
- We believe an economic return framework is the most effective tool for measuring true corporate performance and valuing companies.
- The Life Cycle concept is an important tool for identifying the correct path of analysis and managing portfolio risk.
- Wealth creation is contingent upon management applying capital allocation disciplines appropriate to a company’s position across the corporate Life Cycle.
Importantly, these three components of our philosophy are inherently linked, consistent with each other, and mutually reinforcing. This allows us to select stocks that are most likely to outperform, and to combine them in a portfolio in a way that maximizes risk‐adjusted returns.
Ultimately, the Strategy seeks to invest in companies we believe to be the best allocators of capital, at a discount to intrinsic value.
The Strategy seeks to maintain a concentrated portfolio of approximately 40 securities.
The Strategy will hold stocks across the entire style spectrum. The investment universe includes all publicly traded stocks that are listed on the major U.S. exchanges with a market cap between $400 million and approximately the largest market-cap company in the Russell 2000.
The Strategy invests in companies that are allocating capital consistent with shareholder value creation. To sustain long-term value creation, we seek companies with strong management teams and a knowledge-building culture that drives adaptability.
The Strategy employs a proprietary "dual diversification" approach, which diversifies holdings across sectors and economic life cycles, helps remove potential style biases, and allows for excess return to come from stock selection. Position sizes are established based on their idiosyncratic contribution to portfolio risk relative to the team’s conviction.
The Strategy uses a proprietary, quantitative tool that allows us to isolate the most interesting stocks in our universe—those that appear to allocate capital consistent with shareholder value creation. We go further by conducting fundamental analysis to answer three questions:
- Is the apparent value creation primarily an outcome of management skill or luck?
- Do the company’s culture, capital allocation priorities, and management skill suggest potential persistence of value creation?
- How can we connect our company-specific insights from the questions above to a proprietary insight on valuation and alpha opportunity?