Small Cap Concentrated Equity

Philosophy

We believe:

  • Cash flow is a better measure of corporate performance
  • Capital allocation is the key determinant of value creation
  • Wealth is created through long-term ownership of profitable growing businesses 

Process

Benchmark: Russell 2000 Index

Small Cap Equity Chart

The Small Cap investment process, managed by the Select Equity team, is a bottom-up approach to equity selection, focused on an analysis of a company’s cash flow return on investment. We seek to identify companies trading at a discount to their intrinsic cash flow value. The investment process begins with idea generation, which narrows the universe to companies that have market capitalizations between $100 million and $3 billion at time of purchase, exhibit increasing cash flow rates of return, and have projected upside potential of at least 20%. Fundamental research further refines the universe and builds the foundation for our cash flow driver forecasts and overall thesis. Decisions on whether to buy are based on the improvement in cash flow rates of return; decisions on when to buy are based on valuation. A discounted cash flow methodology is used to calculate valuation. The methodology incorporates the current investing environment by including a market-derived discount rate based on the market’s perception of risk, inflation, taxes, default, and real return, with additional adjustments based on the company’s size, leverage, and volatility. The outcome of this process is an overall value for the business. The team utilizes its expected price target as a base and adjusts its cash flow projections and discount rate to create a range of price targets which serve as the backbone of our portfolio monitoring process. The Small Cap Equity portfolio typically hold 45-70 stocks and are constructed within well-defined risk parameters. The Small Cap Concentrated Equity portfolio consists of the 20 largest stock holdings based on allocation in the Small Cap Equity portfolio.