Philosophy
We offer our Vestor Capital U.S. Small and Mid Cap Value product through a sub-advisory relationship with an experienced advisor managing in excess of $6 billion firmwide. This product utilizes both bottom-up and top-down stock selection methodologies. The investment team seeks companies selling at a substantial discount to their intrinsic values, such that downside risk is minimized and appreciation potential is substantial. The firm has an eclectic process for gathering investment ideas. Half of the research comes from in-house fundamental analysis, while approximately 30% comes from outside sources. The remaining ideas are generated from discussions with various companies’ management and competitors.
Product Information
Our small/mid-cap portfolios consist of 30 to 40 positions, with market capitalizations between $400 million and $10 billion at the time of purchase. The portfolio holds minimal cash, seeking to maintain a fully invested position. Each stock will comprise 2% to 4% of the total portfolio at cost, but no more than 7%. Generally, the financial sector is limited to 40% of the portfolio while other sectors represent 20% or less of the portfolio. The average turnover is 25% annually.
Investment Process
In keeping with its investment philosophy, we maintain that fundamental analysis combined with a quantitative and qualitative methodology can provide a portfolio with excess returns and lower risk compared to the universe of small value stocks. In narrowing down the small cap universe, we use a four-step process to construct portfolios.
Four Step Process:
1: We gather information from both internal and external sources. The team seeks to identify stocks with characteristics such as low price-to-tangible book, high return on equity, low debt levels, and adequate trading volume and market capitalization. Ideas are also generated through the review of specialized small/mid cap and broader market financial publications.
2: Once candidates are identified, the resulting stocks are subjected to a further fundamental research. The analysis includes extensive research that evaluates the quality of the business using such measures as net asset value, current ratios and free cash flow analysis.
3: A top-down analysis of the business cycle is performed, for each industry along with the existing potential growth catalysts. In this step, we seek to identify management teams with a clear understanding of their company, a commitment to shareholders, and a solid business plan to unlock the value of the company. Information is typically gathered through company visits, management interviews, and competitive analysis.
4: Finally, the portfolio is constructed by setting target price ranges and determining minimum and maximum position sizes. Risk controls are then implemented at both the company and portfolio levels. All portfolios are managed on a team basis. Positions are sold when the price objective is realized, a more attractive holding is identified, negative stock or industry news emerges, or a position reaches more than a 7% weighting in the portfolio.