Diversified Small Cap Value Equity

At a Glance
  • Primary Benchmark: Russell 2000® Value Index
  • Universe: Small-capitalization U.S. common stocks
  • We purchase stocks with a low valuation based on either P/E or P/B that pass through our quantitative and fundamental deselection processes
  • Our portfolios generally purchase all holdings on a capitalization-weighted basis
  • Cash is residual of the investment process, and we manage portfolios with the goal of remaining fully invested at all times
We seek to outperform the Russell 2000® Value Index by investing in undervalued small-cap stocks as identified by a low price-to-earnings (P/E) or price-to-book (P/B) ratio.
Investment Process Summary
We manage the portfolios with a disciplined combination of quantitative and fundamental investment styles. Our investment strategy employs a deselection approach with the goal of identifying and avoiding undervalued stocks that we believe will have difficulty outperforming the benchmark. We utilize a team-oriented process with experienced investment managers.
Investable Universe
Within the universe of U.S. equities, we identify stocks with:
  • Market capitalizations between $100 million and the 1,000th largest U.S. stock
  • P/E or P/B ratios among the lowest 25% in this universe
Deselection Process
From the resulting ~400 small-cap value companies, we eliminate the third of stocks with the lowest stock price momentum over the previous nine months, as these stocks often continue to underperform.

We perform our fundamental analysis on the remaining 300-500 companies. We seek to understand why each is undervalued to avoid stocks that are unlikely to return to a normal valuation. Our focused research process allows us to efficiently manage a diversified portfolio of companies with desirable characteristics. Our in-depth review includes:
  • Adjusting reported earnings and book values to purchase only genuinely undervalued stocks;
  • Eliminating stocks with significant pre-announced earnings deteriorations; and
  • Excluding stocks with severe fundamental decline or substantial financial, legal, or product risks.
Portfolio Management
The portfolio holds approximately 325-450 stocks to diversify risk and enhance liquidity. Within the limits of trading liquidity, we initially weight each stock’s position proportional to its market capitalization. Industry and sector weights are the direct result of our bottom-up investment process.

Typically, we sell a stock when: its P/E and P/B ratios both no longer are undervalued, its market cap no longer qualifies as small cap, its price momentum lags the market sufficiently to trigger our stop loss control, a substantial number of new shares are issued, or fundamentals deteriorate significantly.