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Small-Mid Cap Value

Strategy Overview

River Road’s Small-Mid Cap Value (SMID) Strategy employs the same bottom-up, fundamentally driven investment process as the firm’s Small Cap Value Strategy.  The primary difference between these strategies, other than market capitalizations and benchmarks, is that the greater liquidity in the SMID universe yields fewer target holdings.

Universe

The Small-Mid Cap Value Strategy targets all U.S.-listed equity securities with market capitalizations between $250 million and $10 billion.

Investment Objective

The Small-Mid Cap Value Strategy seeks to outperform the Russell 2500 Value by 200 to 400 bps gross of fees over a market cycle.

Investment Process

The Small-Mid 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-Mid 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-Mid Cap Value Inception Date: March 1, 2007