Lanny Thorndike is the Portfolio Manager for the Century Small Cap Growth strategy. He is supported by Century’s equity analysts and traders.
The team conducts fundamental, bottom-up research analysis on existing and prospective holdings. The research analysts have dedicated GICS sector coverage. We believe that this dedicated focus leads to strong knowledge and experience, which we think enhances the Small Cap Growth investment process. Each equity analyst has deep experience researching companies. As a result, each of them has developed an extensive list of company and industry contacts, along with domain expertise, that we believe are valuable when researching companies. The team’s approach to company research is intensive, with the portfolio managers and equity analysts each having a goal to meet with 60-80 companies per year.
We believe that the Small Cap market segment is inefficient as smaller companies are less followed. This provides the opportunity to utilize fundamental, bottom-up research to identify superior growth companies and misvaluations. Focusing on higher quality growth franchises allows for capital appreciation, while potentially reducing the downside risk associated with higher volatility stocks. Over a full market cycle, we believe that having a quality bias should lead to a more favorable risk-return experience for our investors. Valuation is a function of the level and direction of a company’s ability to deliver superior returns on capital. A disciplined investment process combined with an experienced and research intensive investment team allows for higher portfolio concentration relative to peers.
The Small Cap Growth market capitalization range is typically $250 million to $3.5 billion at purchase.
The Small Cap Growth strategy invests in 3 types of investment opportunities: 1) “Core Growth” companies, which are often market leaders with strong competitive advantages. Typically, these companies exhibit above average return-on-equity, high levels of recurring revenue, less volatile revenue and EPS growth, and improving margins. They tend to be durable growth franchises with established products and services. In short, these are what we consider to be the best companies in our investment universe; 2) “Emerging Growth” companies, which tend to exhibit more rapid growth and greater margin expansion potential. They tend to be more undercovered with large market potential and attractive economics; and 3) “Opportunistic Growth” companies, which at purchase often exhibit lower consensus expectations and are typically underappreciated by the market. Opportunities within this segment tend to be companies within the more highly cyclical segments of our investment universe. We seek to capture out-sized upside potential with lower downside risk as a turnaround for the company progresses.
Typically, companies identified as Core Growth and Emerging Growth represent at least 80% of the portfolio, while Opportunistic Growth companies generally represent less than 20%. Portfolio allocations across the three opportunity sets are a derivative of the team’s fundamental, bottom-up analysis. Generally, allocations to Core Growth companies are higher in times when the equity markets seem fully valued and there’s more downside risk than upside potential in more economically sensitive sectors. Buy decisions result from the company matching one of the three types of growth opportunities we emphasize.
Valuation is an important part of the investment process. Each company is put through a rigorous, proprietary intrinsic valuation analysis. The investment team determines a company’s intrinsic value based on a variety of factors. The team emphasizes revenue, margin, and earnings trends with a primary focus on a 12 to 24 month timeframe. An absolute valuation analysis using a broad range of factors ultimately results in a range of values from which a 12-month price target is established. Price targets are modified over time to reflect any changes to a company’s fundamentals. To qualify for purchase, the team targets at least a 20% discount to intrinsic valuation for Core Growth companies, and a 30% discount to intrinsic valuation for Emerging Growth and Opportunistic Growth companies.
There are typically 50-65 holdings in the Small Cap Growth portfolio. Individual position sizes generally range from 1-4% of portfolio assets, with maximum position sizes at the time of purchase of 4%. Initial position sizes are often 0.5 – 1.0% and Core position sizes are in the 2-4% range. The Portfolio Manager typically diversifies holdings across sectors and monitors portfolio characteristics relative to the Russell 2000 Growth index; however, sector weightings may vary significantly from the index.
The team utilizes a comprehensive and flexible sell discipline designed to control risk and limit the impact of a single stock on the performance of the entire portfolio. The following may trigger a sale: 1) price target discipline; 2) deterioration of fundamentals; 3) a catalyst event or a better long-term opportunity exists elsewhere; or 4) a position size exceeds 5%.