US SMID Cap Equity
The US Small and Mid (SMID) Cap Equity strategy seeks capital appreciation.
The strategy is a bottom-up, fundamental and research based approach. The portfolio manager and analysts seek to identify those companies that have compelling business models, a strong management team and attractive valuation levels. Sources of research include company managements, competitors, media and suppliers. The portfolio of approximately 90 to 120 stocks is diversified by type of company, with approximately 50-to-70% of the portfolio invested in mispriced growth opportunities, 20-to-50% in “steady eddies” (i.e. companies with stable and dependable earnings and revenue characteristics), and 0-to-20% in turnarounds.
The US Small Cap Equity team is managed by Jenny Jones, who has over 36 years of investment experience. The team is made up of seven research analysts dedicated to small and mid-cap companies, with an average of 21 years' investment experience and a product manager.
Jenny B. Jones
Jenny Jones is the Head of US Small and Mid-Cap Equities at Schroders, based in New York. She joined in 2002 and was formerly a portfolio manager and Executive Director at Morgan Stanley Investment Advisors Inc. Jenny began her investment career in 1980 when she joined Drexel Burnham as a Sales Liaison/Assistant Options Strategist.
We believe that the stocks of companies with unrecognized or underappreciated growth dynamics will be rewarded over time. These companies frequently have a change dynamic in the company or industry that will lead to higher growth rates over an intermediate to longer time frame. This is our largest category of stocks. This category has provided the bulk of our return over time.
Additionally we believe that companies with recurring earnings/cash flow/revenue characteristics will be rewarded, particularly in difficult markets. This is our second largest group and the category provides the defensive characteristic that is a hallmark of our approach.
Third, we believe that companies who have experienced business or operational difficulties can be rewarding investments if there is a catalyst in place to return the company to a growth path. These stocks provide a small bit of higher return opportunity to the portfolio. This category is typically less than 10% of the portfolio.
Finally, we believe deep fundamental analysis is required to identify the types of companies described above. This included understanding of a company’s business model, cash flow dynamics, earnings patterns and prospects, management and valuation. We are valuation sensitive and seek to be disciplined in both our buying and selling.
We focus on the upper end of the small cap and the lower portion of mid cap companies. Currently we view the group as being between $750 million and $10 billion in market cap.
Within this universe, we look to identify companies that offer strong business models, attractive margins and superior management teams. The research process is extensive as we drill down on many of those ideas that we believe may be potential investments. We are bottom-up, fundamental research-focused investors. The macroeconomic environment will be considered in the context of the investment, but a stock must have strong attributes on its own to be purchased.
A distinguishing characteristic of our approach is that we invest in three different types of growth in the portfolio, which we identify as:
- Mispriced Growth
- Steady Eddies
Mispriced Growth are companies in which some sustainable change is occurring that we think will lead to a higher level of earnings, revenues, cash flows or margins over the ensuing two to three years. Further, we believe that the market has not fully recognized the potential impact of this change in the stock price. Mispriced growth stocks are normally 50-to-70% of the portfolio, and normally our best returns have been earned in this group. These stocks tend to do best in rising markets, however, this group has not been as resilient in negative market environments as steady eddies.
Steady Eddies comprise 20-to-50% of the portfolio and can be characterized as being stable growth companies. While their growth rates typically are not as high as the mispriced growth stocks, they have tended to have a more consistent quality to them. This can be due to a high level of recurring revenues. These stocks typically have held up well in declining markets, for the obvious reason that in that environment the market tends to be looking for companies with some predictability or stability to their earnings. We believe these stocks provide a defensive ballast to the Fund and have been a significant contributor to our strong downside capture ratio and lower overall standard deviation.
Turnarounds, which can be anywhere from 0-to-20% of the Fund are companies in which something has occurred to take the company from its growth path. In order to consider a stock a 'turnaround', we must see a catalyst in place that we believe will fix the problem and some evidence that organic growth is beginning to return to the company. The performance of these stocks is less predictable (relative to overall market conditions) than the other two categories. However, historically when these stocks work they have added a nice performance boost to the portfolio.
The combination of these three distinct and complementary types of companies help to reduce volatility and tend to offer a level of protection in down equity markets.
- Flexible core investment style; able to reflect changing market dynamics throughout the economic cycle
- Bottom-up fundamental research provides the basis for stock selection
- Focus on companies with strong appreciation potential selling at reasonable valuations
- Invests in a combination of three distinct and complementary types of companies; potentially smooths volatility and tends to offer a level of protection in down equity markets
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