Jeff Kerrigan, CFA, is the Portfolio Manager for the Century Small Cap Value 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 Value 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 Manager and equity analysts each having a goal to meet with 60-80 companies per year.
Century’s Small Cap Value investment philosophy has four primary tenets:
- Small capitalization markets are inefficient. This provides an opportunity to utilize a fundamental research approach to identify superior companies trading at a discount to intrinsic value.
- In the context of value investing, it is important to delineate between less innovative and more innovative sectors.
- Focus on opportunities with the greatest upside potential, emphasizing a combination of both classic valuation and relative valuation/earnings power.
- Neutralize relative benchmark risk to isolate stock selection as the primary source of alpha mitigating the difficulty of consistently predicting market, sector, and industry direction, while delivering high active share.
The Small Cap Value market capitalization range is generally within the range of the Russell 2000 Value (R2000V) index (typically, $50 million to $5 billion).
The strategy’s fundamental research process includes both financial modeling and qualitative analysis. The model is designed to develop an understanding of a company’s operating dynamics: financials, margins and growth rates and perform various scenario and sensitivity analyses.
The strategy’s qualitative analysis is focused around researching the key drivers of the business. The Portfolio Manager analyzes the industry’s competitive landscape, speaks with company management and listens to past earnings calls. The company specific research is further complemented with a formal sector profile designed to focus on the key catalysts driving sector dynamics.
The strategy’s primary valuation methodology is a discounted cash flow (DCF) model. Once the DCF analysis is completed, the Portfolio Manager considers the output within the context of less innovative and more innovative sectors. In less innovative sectors, we compare a company’s intrinsic value to the current stock price. In more innovative sectors, we compare a company’s intrinsic value to street estimates and the deviation between the two.
The Portfolio Manager constructs a portfolio typically consisting of 70-110 companies. Larger positions generally range from 1.5 – 4.0% and tend to exhibit high expected return potential and a positive contribution to risk. Smaller positions typically range from 0.3 – 1.5%. The risk and return profile can be higher or more moderate. If the return profile is high, the smaller position is generally based on the desired sector or industry exposure relative to the benchmark from a portfolio construction standpoint.
The Portfolio Manager utilizes a comprehensive and flexible sell discipline. The following may trigger a sale:
- Company’s cumulative valuation and earnings upside potential approaches fair value
- Better opportunities exist
- Fundamental deterioration of the company
- Market capitalization rises above a targeted range
- Position size exceeds 5%