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SMID Cap Growth
Head of U.S. Small Cap and Portfolio Manager
Joseph Basset, CFA
Equity Analyst and Portfolio Manager
SummaryActively managed SMID cap growth strategy driven by bottom-up fundamental research seeking high-quality companies with strong balance sheets and cash flow characteristics that are beneficiaries of sustainable growth trends.
- Bottom-up stock selection is the key driver of alpha
- Sector and industry experience and specialization are the keys to value-added fundamental research
- Positive cash flow generation and deployment drive earnings per share, and ultimately stock prices
- Portfolios constructed in accordance with these principles, consisting of high quality companies that are beneficiaries of sustainable secular growth trends, and will consistently outperform relevant benchmarks and peer group averages
ObjectiveTo outperform the Russell 2500 Growth Index by 2.5-3.5% annualized before management fees over full market cycles with expected annualized tracking error of 3-6%.
ProcessWe begin by identifying companies in the Russell 2500 Growth Index, plus opportunities outside of the index with a market capitalization that falls within the parameters of the index. Sector valuation methodologies are used to refine the investment universe by ranking each stock within its own sector based on growth characteristics, financial position, valuation and other fundamentals. We identify and quantify secular and cyclical themes likely to drive growth opportunities over a foreseeable time horizon, and assess the macro environment to understand what variables are likely to drive growth opportunities or affect equity risk premium. Next, the sector analysts "follow the cash flow" by evaluating cash flow, balance sheets and income statements to determine the ability of a company to generate and fund expected growth and to generate attractive returns on their cash flow. The analysts also analyze sector and industry fundamentals, competitive positioning and company management. Holdings typically have accelerating revenue, EPS and cash flow growth and attractive valuations based on price/sales, forward PE, cash flow yield and net cash/market capitalization, and are beneficiaries of a secular or cyclical theme. Portfolio construction is based on the attractiveness of each stock, given benchmark weight, expected return, perceived risk and liquidity.
- Leverages the skills and philosophy of an experienced small-cap team with proven track record
- Diversification across small- and mid-caps offers potentially higher returns and well controlled risk
- Disciplined, repeatable process driven by fundamental research
- High quality holdings in terms of earnings, cash flows and balance sheet strength
Principal RisksAll investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. The strategy may use derivatives such as options and futures, which can be illiquid, may disproportionately increase losses and have a potentially large impact on performance. Mid-cap stocks generally have higher risk characteristics than large-cap stocks. In exchange for higher growth potential, investing in stocks of smaller companies may entail greater price volatility and less liquidity than investing in stocks of larger companies. More particularly, growth-oriented stocks typically sell at higher valuations than other stocks. If a growth-oriented stock does not exhibit the level of growth expected, its price may drop sharply. Additionally, growth-oriented stocks have been more volatile than value-oriented stocks. Other risks include but are not limited to other investment companies’ risks, price volatility risks, securities lending risks and portfolio turnover risks.
*There is no guarantee that this objective will be achieved.