The Small Cap Growth investment philosophy rests on both qualitative and quantitative factors in support of our overall goal of providing significant, long-term excess return over the Russell 2000 Growth Index. Growth can be defined as an increase in the company’s gross investment base. Our initial focus is on the balance sheet, specifically the assets a business requires in order to generate cash flow. We believe intrinsic value is created by companies that grow their asset base with the ability to produce a cash flow rate of return above their cost of capital and have opportunities to re-invest into additional assets that generate similar or higher rates of return. We believe it is not the rate of the growth but the profitability and rate of change of the growth that creates value.
Our inclusive process involves examining four key governing components: Corporate Performance, Systematic Effects, Sustainability and Intrinsic Value. We examine a company’s Corporate Performance by looking at the operating history of the company and gaining an understanding of management’s skill set, the company’s core competency, their culture and their ability to evolve. Next, we look to the Systemic Effects, or the tailwinds and headwinds of the business. We evaluate the macro factors affecting the business, their position in the market and we look to gain an understanding of the key drivers of the business. Our third component is focused on the Sustainability of the growth and the returns. We look for moats or barriers to protect the margins and allow the company to beat the return fade. Can they maintain or build their competitive advantage? Where are they in their corporate life cycle? Can we evaluate their competition and understand the threats to the business? Our final step is focused on determining what we should pay for the business. Our intrinsic value is a dynamic process and we continually update the inputs and test the investment thesis that leads to the valuation estimate.
Ideas are generated on an ongoing basis as we work to assess the addressable end markets, competitive positioning and trajectory of the companies in the investable universe. Our emphasis is on understanding the business drivers of the returns on invested capital, the opportunities available to companies to deploy additional capital at attractive rates of return, and the ability of management teams to capitalize on these opportunities.
The Small Cap Growth strategy concentrates on companies with a market cap between $300 million and $5 billion or representative of the market cap range of the Russell 2000 Index. The universe is approximately 2500 stocks.