Don Bisson, CFA, is the Portfolio Manager for the Century SMid 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 SMid 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 Manager and equity analysts each having a goal to meet with 60-80 companies per year.
The SMid Growth investment philosophy is based on the premise that capital will flow to sectors of the market where returns on invested capital (ROIC) are above average and/or rising. The investment team believes that the small and mid cap segments of the market are inefficient and provide opportunities to utilize fundamental, bottom-up research to identify superior growth companies and misvaluations. The SMid Growth investment approach is fundamental, bottom-up in nature.
The SMid Growth market capitalization range is mostly between $800 million to $6 billion at purchase.
The SMid Growth strategy invests in 3 types of investment opportunities; 1) “Core Companies”, which exhibit a strong competitive advantage, above average margins and returns on capital, and above average earnings per share and sales growth, 2) “Underestimations”, where the opportunity set is large and/or expanding rapidly, earnings estimates and returns on capital are typically rising, and we believe the market has underestimated revenue and earnings potential for the company, and 3) “Overreactions” (or “Fallen Angels”), where a growth company has experienced a temporary setback, we believe the negative news associated with the company is fully discounted in the share price, and we are comfortable with the fundamental milestones we have created for tracking the recovery process for the company. Buy decisions result from the company matching one of the three types of growth opportunities we emphasize.
Valuation is an important part of the buy process with each company put through a rigorous, proprietary intrinsic valuation analysis. The investment team incorporates two proprietary methodologies to measure valuation: 1) a Discounted Cash Flow (or “EVA”) model and 2) a Dividend Discount Model (“DDM”). The “EVA” and “DDM” analysis are complemented by 3) a comparable company analysis and 4) a historical relative P/E valuation. To qualify for purchase, the portfolio manager targets at least a 20% discount to intrinsic valuation for established core growth, underestimated growth, and temporary overreaction growth companies.
There are typically 50-65 holdings in the SMid Growth portfolio. The portfolio is flat in the sense that weightings for individual holdings usually represent about 2% of the portfolio, with the top 10 holdings typically accounting for roughly 23-25% of the total portfolio. The rationale is that with roughly a 2% weighting for each stock, all holdings are equally important. The Portfolio Manager typically diversifies holdings across sectors and monitors portfolio characteristics relative to the Russell 2500 Growth index; however, sector weightings may vary significantly from the index.
The Portfolio Manager utilizes a comprehensive sell discipline designed to control risk and limit the impact of a single stock on the performance of the entire portfolio. Each holding has a price target that’s generated by our valuation approach. The following may trigger a sale: 1) a permanent deterioration of fundamentals; 2) overvaluation and technical deterioration; 3) better opportunities are available; 4) a position size exceeds 5%; or 5) market capitalization rises above a targeted level.