River Road’s Small Cap Value Strategy utilizes a fundamentally driven research process to identify attractive purchase candidates from a universe of smaller capitalization stocks. The stock selection process is complemented by a risk averse approach that employs both balanced diversification and a structured sell discipline.
The Small Cap Value Strategy targets all U.S.-listed securities with market capitalizations between $50 million and $3 billion, at time of purchase.
The Small Cap Value Strategy seeks to outperform the Russell 2000 Value by 200 to 400 bps gross of fees over a market cycle.
The Small Cap Value Strategy investment process proceeds through four stages:
I. Idea Generation
River Road employs two research methodologies – Systematic and Dynamic.
Systematic Research: Screening of the firm’s two principal databases — Value Line and FactSet.
- Qualitative screening with Value Line: Provides a snapshot of a business and up to 15 years of relevant quantitative historical trends
- Quantitative screening through FactSet: Identifies stocks that best exhibit the Strategy’s five critical criteria
Dynamic Research: An active search for attractive candidates among:
- SEC filings (10-K/Qs, 8-Ks, proxy statements, insider trading, share repurchases/dividend increases, etc.)
- Industry news and research
- Competitor analysis
- Our Watch List (including former portfolio holdings)
- Various other contacts and resources established by the Portfolio’s management team
II. Security Analysis
River Road builds portfolios in house, from the bottom up, making security-specific research central to our process. The Small Cap Value Strategy focuses on identifying the most attractive companies that meet the Strategy’s five critical criteria:
- Priced at a discount to value: Target discount ≥ 25% of a company’s valuation
- Attractive business model: Sustainable, predictable, understandable, with reasonable growth prospects and high returns on equity and invested capital
- Shareholder-oriented management: Insider ownership, accretive transactions, debt reduction, dividend initiations/raises
- Financial strength: Free cash flow, attractive balance sheet
- Undiscovered or underfollowed by Wall Street or misunderstood by investors
III. Portfolio Construction
The Portfolio targets 60 to 70 holdings, with the actual number of holdings dependent upon market conditions. The stocks purchased are those that best meet the selection criteria and offer the greatest potential for capital appreciation.
The decision-making process is dynamic and team-based. While the lead portfolio manager has controlling authority, typically decisions are made by a consensus of the portfolio managers.
IV. Sell Discipline
We believe that the key difference between a losing strategy and a winning strategy is that losers make big mistakes and winners make small mistakes.
- Our sell discipline helps keep the inevitable individual mistakes from causing large, permanent losses of capital in the broader portfolio.
- We do not average down on losing positions.
Small Cap Value Strategy Inception Date: January 1, 1998