A North American equity fund that invests in both mid and small-cap stocks. The approach is diversified across higher growth, stable growth and turnaround companies. Within its sector, the fund features in our 'Smaller to Mid-Cap, Blend' category.
The fund’s KIID Synthetic Risk and Reward Indicator (SRRI) is 6. This is a regulatory measurement that is, where possible, calculated from the volatility of its weekly performance over a five-year period. A score of 6 means the fund’s historic volatility is between 15% and 25%.
The fund’s five-year realised standard deviation is lower than the mainstream North American mid and small-cap index. This is as we would expect, given the manager’s considered, risk-aware approach and the portfolio’s diversified nature. Different share classes could have differing SRRI scores.
The fund is managed by Robert Kaynor, Head of US Small and Mid-Cap Equities. He was appointed Research Director in 2014 and lead manager on the fund in 2019. He is supported by a team of dedicated mid and small-cap analysts, led by Head of Research, Joanna Wald. Ms Wald works closely on the fund with Mr Kaynor and manages the Schroder ISF US Smaller Companies Impact fund.
The team is dedicated to conducting bottom-up research as they believe it creates an information edge in a less efficient segment of the market. They seek to avoid the damage that comes from a misunderstanding of risk and they think very carefully about the price they pay when initiating a position. They believe in the importance of diversification and they invest in three main types of stocks - "Mispriced Growth", "Steady Eddies" and "Turnarounds" - thereby exposing the fund to different sources of alpha.
The portfolio typically features 80 to 100 stocks, but at times can exceed this. There is a maximum of 5% in any one security. Sector weights must be within +/-10% of the benchmark, but outside of this guideline, the benchmark is not a strong driver of fund positioning. The cash position is usually between 3% and 5%.
Ideas are taken from the upper end of the small-cap universe and the lower portion of the mid-cap universe, specifically those with a market cap of between $750 million and $20 billion. The market cap of stocks held in the fund can grow above the $20 billion point, as long as they have not reached the team’s price target.
The process is driven by the team’s bottom-up research. The most important component of their research effort is to garner a deep understanding of a company’s business model. In building a compelling investment thesis, they assess a company’s sustainability features, its addressable market and its competitive opportunities and threats. When looking at financials, they pay particular attention to cash flows and balance sheets. A detailed understanding of the relevant industry is also important. For a position to be initiated, the manager must have high conviction in the investment thesis and comfort in the valuation. The macro environment is considered in the context of the investment, but a stock must have strong attributes in its own right in order to be purchased.
Structurally, the portfolio is invested in three types of stock. "Mispriced Growth" companies comprise 40%-60% of the fund; they are companies that are experiencing change that will lead to higher earnings, cash flows or margins over the ensuing two to four years. They tend to perform well in rising markets but they are usually less resilient in negative market conditions. "Steady Eddies" comprise 30%-60% of the fund; they are stable companies whose growth may be lower but are of a higher quality, for example, recurring revenue businesses. They tend to provide a defensive element to the portfolio in more negative market conditions. "Turnarounds" can be 0%-10% of the fund; these companies have experienced an interruption to their growth path but there are reasons to believe the problems can be overcome. The investment returns of these stocks is less predictable (relative to overall market conditions) when compared to the other two categories.
Formal documentation, including the fund prospectus and the KIID, should be sought directly from the asset manager. For ease of reference, a link to the ASSET MANAGER WEBSITE can be found above.
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