A special Q&A with portfolio managers, James Gowen, CFA, and John Ragard, CFA, reflecting on the strategy’s growth during the past five years.
Q1: What led to the launch of the Spouting Rock Small Cap Growth strategy?
A1: After spending time with other firms, we reunited and wanted to capitalize on our 12 years of working together to design and launch a small cap growth strategy that leveraged the knowledge garnered from the shared 30-plus years of experience over many market cycles. We wanted to leverage this background to create what we believed to be the strongest approach that seeks to deliver meaningful long-term performance in small cap growth investing. Using our team-oriented process, decades of experience, extensive set of management relationships and Wall Street contacts, we felt there was a great opportunity to deliver long-term investment performance by focusing on the fundamentals of the businesses and the quality of the management teams. The result was Spouting Rock Asset Management Small Cap Growth, an institutionally-oriented, disciplined strategy consisting of companies that have the potential to perform in various market environments and conditions providing exposure to what we designate as “sustainable future compounders,” companies with diverse models and economic growth drivers undergoing improvements that may provide higher compound earnings and stock price appreciation in the future.
Q2: Are you pleased with the strategy’s evolution over the past five years?
A2: The team is pleased that our initial thesis and approach have been validated and that we have delivered as expected. We believe we have achieved strong relative results since inception, annualizing an 11.62% net return compared to our benchmark, the Bloomberg 2000 Growth Index, a rise of 4.84%, and cumulative performance at 73.22% versus 26.69% for the benchmark. Additionally, according to eVestment’s database that tracks the performance of institutional investment managers, the trailing 3- and 5-year performance for Small Cap Growth is in the top deciles compared to 167 peer strategies, emphasizing our belief that it is an attractive short-term window to allocate to small cap growth with a longer-term investing horizon. We are fortunate to have the support of a larger platform of curated managers to collaborate with and believe that we have a strong pipeline and productivity.
Q3: Given the market changes in the past five years, have you altered your investment process?
A3: Our investment process remains the same and we believe has proven its value-add to date. We continue to conduct independent, bottom-up, fundamental analysis seeking to invest in quality, growth companies that we believe will perform well regardless of market conditions. With that being said, we constantly seek to improve the process around our 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. We are cognizant of how our portfolio companies might be perceived across sectors and industries so that we are aware of potential sentiment or valuation risks. We strive to continually improve, learn from our mistakes and test our thesis on each name in the portfolio.
Q4: What improvements did you make during the recent market downturn that you feel the portfolio will benefit from in the future?
A4: Given the prevalence of global macro risks experienced by investors across every asset class, even those previously considered “risk-free”, coupled with the unprecedented volatility we have experienced year-to-date, we continue to manage and position the portfolio to minimize potential areas of risks. We trimmed exposure to areas like higher-priced consumer durables and where sales demand might be sensitive to higher interest rates, while the valuation contraction we have seen in our portfolio holdings has served to spring-load potential future appreciation as valuations return to historic averages. We continually confirm that each holding aligns with our thesis and further scrutinize potential companies for various scenario risks.
Q5: Where are you finding opportunities today and is this different from five years ago?
A5: 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. Year-to-date, five companies in the portfolio were acquired at significant premiums by private equity and strategic buyers. We control how large sectors get in our portfolios but find our sector and industry-agnostic approach to be the most productive in uncovering new opportunities. For example, we previously found successful growth ideas in such diverse areas as data center REITs, transportation and even energy that is less impacted by swings in commodity process.
Q6: How is Small Cap Growth positioned for the future?
A6: We do not see an end to the accelerated pace of change, innovation and disruption driven by small cap growth companies, especially as we emerge from the volatility caused by COVID, world economic events such as the Ukrainian war and a recent interest rate spike on the heels of higher inflation. Smaller companies are the engines of employment growth and global competition and we believe are uniquely positioned to innovate and grow faster without regard to protecting the entrenched interests often embedded in larger companies. These smaller companies are also more domestically-oriented and less subject to restrictive regulation and legislation compared to larger cap peers. Further, we believe the current market environment offers greater opportunity given the valuation compression in the equity markets that has been especially pronounced going down market cap size and as the “value” style has outperformed “growth” over the last few years. There are more structural inefficiencies in small caps as fewer publishing analysts follow these companies and almost 40% of an average small cap company’s shares are held in passive (index and ETF) hands, proving opportunities for fundamental research-driven investors seeking market inefficiencies.
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For general use. All rights reserved. The views expressed are those of Spouting Rock Asset Management platform, as of November 2022, and are not intended as investment advice or recommendation. For informational purposes only. Investments are subject to market risk, including the loss of principal. Past performance does not guarantee future results. There can be no assurance that any investment strategy will achieve its objectives or avoid substantial losses. There can be no assurances that any of the trends described will continue or will not reverse. Past events and trends do not imply, predict, or guarantee, and are not necessarily indicative of future events or results. Investors cannot invest directly in an index. Investment advice is offered through Spouting Rock Asset Management, LLC which is registered as an investment advisor with the U.S. Securities and Exchange Commission (“SEC”) and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability. For a list of portfolio holdings, composite presentation and disclosures, standard fee schedule or to request a presentation and/or a copy of SRAM’s ADV Part 2A please contact Operations at firstname.lastname@example.org. Chart source: Total returns (%) as of 9/30/2022. Effective July 1, 2021, the Fund’s primary benchmark is the Bloomberg 2000 Growth Total Return Index. Prior to July 1, 20201, the Fund’s primary benchmark was the Russell 2000 Growth IWO Index.
|Annualized||SCG Return (Net) (%)||Bloomberg US 2000 Growth TR Index (%)|