A special Q&A with portfolio managers, James Gowen, CFA, and John Ragard, CFA, reflecting on the strategy’s growth during the past three years.
Q1: Small Cap Growth was launched in 2017. Have you altered your strategy given the change in markets over the past three years?
A1: Our investment process remains the same. We continue to conduct independent, bottom-up, fundamental analysis seeking to invest in quality, growth companies that we believe will do well regardless of market conditions. With that being said, we are constantly seeking to improve and hone the process around the core discipline. One example of this is allowing a slightly increased valuation flexibility, after a position has been taken, as we are finding the market is rewarding our serial outperformers, while we look to keep our overall portfolio risk profile constant.
Q2: What differentiating characteristics does Small Cap Growth have?
A2:
1: We have a depth and breadth of experience that helps to guide our decisions. During our 30 years each in the industry, we’ve witnessed many market environments that have allowed us to learn, improve and better identify new investment opportunities and avoid risks, which we believe gives us a higher probability of making the right decisions.
2: Our generalist approach and process naturally allocate time and capital to where we see the most dynamic areas of growth, regardless of the economy or market backdrop. We concentrate our efforts where we feel we can build and maintain a research edge and avoid those areas where we see less opportunity or have less comfort in their compounding success.
3: We take an institutional approach to build the portfolio from the bottom-up, diversifying by sector, industry, and characteristics to capture long-term growth resulting in higher active share and avoid market timing. Additionally, we take a forward-looking perspective on quality and valuation work.
4: We build higher active share portfolios of Sustainable Future Compounders, companies with diverse models and economic drivers of growth undergoing improvements that may provide higher compound earnings, growth and stock price appreciation years into the future.
5. We integrate ESG in an effort to mitigate risk and enhance our ability to isolate those unique compounders that are striving to do right by all their constituencies.
Q3: How can Small Cap Growth complement a client’s portfolio?
A3: Active share management in inefficient asset classes like small cap and emerging markets have consistently provided above market performance a majority of the time, particularly in challenging markets. Our portfolios provide a diversifier to most asset allocations, and to date, have provided strong alpha generation, especially relative to passive or index-based approaches. Small Cap Growth provides exposure to the growth, innovation and disruption driven by our smaller, domestically-oriented, dynamic portfolio companies, while our focus on risk management has provided what we consider to be strong up-market performance with increased down-market protection. Our strategy complements a client’s existing portfolio that may already have allocations to small cap core or value or can provide the additional exposure to further enhance a portfolio.
Q4: Are there any specific areas where you are currently finding opportunities?
A4: Healthcare and technology will always be important opportunity areas. Within the past five years, these two sectors have had the strongest revenue growth, the highest aggregate and relative spending on research and development and, interestingly, the largest number of mergers and acquisition activity as larger companies seek to supplement relatively slower organic growth trends. We do control how large sectors get in our portfolios, but find our sector and industry agnostic approach to be the most productive in uncovering these new opportunities.
Q5: Do you have a good example of an under followed or niche stock that you can share?
A5: We invested in a a small, growing national supplier of infusion pumps and services that allow cancer patients to receive chemotherapy at home and the company is successfully expanding into adjacencies of pain management and wound care, both in home-based settings. This company has experienced growth, due in part to the recent pandemic, as their offering provides patients and providers a preferred method and setting to receive care, particularly those looking to avoid visiting the hospital. We initiated a position when Wall Street coverage did not exist, and were pleased to see two analysts subsequently launch coverage with possibly more going forward.
Q6: How is Small Cap Growth positioned for the future?
A6: We see no end to the accelerated pace of change, innovation and disruption that is being driven by small cap growth companies. These smaller companies are the engines of employment growth and global competition and are uniquely positioned to innovate and grow faster without regard to protecting the entrenched interests often embedded in larger companies.
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