WHY INVEST IN THE SMALL-CAP VALUE ASSET CLASS?
GREATER INEFFICIENCIES IN THE SMALL-CAP MARKET LEAD TO GREATER POTENTIAL OPPORTUNITIES.
1) Log scale. SOURCE: Eugene F. Fama and Kenneth R. French, The Anatomy of Value and Growth Stock Returns, August, 2007. Ongoing updates to data by Kenneth R. French Data Library, Tuck School of Business at University of Dartmouth. Break point between small and big is median market equity (ME). Break point for valuation is 70th book equity/market equity (BE/ME) percentile and 30th book equity/market equity (BE/ME) percentile.
“Small stocks tend to have higher average returns than big stocks and value stocks tend to have higher average returns than growth stocks.”
– Kenneth R. French
TWO LONG-ONLY, SMALL-CAP VALUE STRATEGIES:
STERLING SMALL-CAP VALUE DIVERSIFIED AND STERLING SMALL-CAP VALUE FOCUS
PHILOSOPHY
Both strategies seek to deliver total returns higher than the Russell 2000 Value Index on a risk-adjusted basis within a diversified and concentrated portfolio. To achieve this, we apply a consistent and repeatable process developed through decades of investment management experience. We conduct in-depth, fundamental research that we believe yields proprietary knowledge, particularly among smaller, underfollowed companies. Our focus on identifying unlocked value is what allows us to seek excess returns and above benchmark performance. We invest with a long-term time horizon at significant discount to our estimate of intrinsic value or “true worth,” and then carefully monitor our holdings as we wait for the gap between market price and “true worth” to close.
INVESTMENT DECISION-MAKING PROCESS
Our investment decision-making process for both strategies is built around a research-driven, fundamentals-based effort to estimate the intrinsic value or “true worth” of companies in our universe, which is primarily those companies within the market-capitalization range of the Russell 2000 Value Index. We invest in companies that we believe offer the most attractive total return on a risk-adjusted basis where we can identify a catalyst to realize the underlying value. We construct extensive financial models of our candidates for purchase, review public filings and conference call transcripts, and analyze competitors, suppliers and customers in order to make our most informed estimate of intrinsic value and expected return. We sell a holding once it no longer offers an attractive total return.
FOUR CORE MANAGEMENT PRINCIPLES
- We adhere to a disciplined, repeatable investment process
- We remove emotion and trust conviction
- We attempt to invest at a significant discount to “true worth”
- We exercise the patience necessary to allow the thesis to be fully realized
RESEARCH AND INVESTMENT PROCESS
- Begin with Universe of All
U.S. Small-Cap Stocks - Quantitative Screens
- Fundamental Research
- Intrinsic Value Estimate
- Rank Opportunities
- Buy
- Sell
Begin with Universe of All
U.S. Small-Cap Stocks
- Search for Underfollowed, Misunderstood, Misperceived and thus MISPRICED Securities with a Viable Catalyst for Value Realization
Quantitative Screens
- High-Level Valuation Screens to Assess Valuation and Quality
Fundamental Research
- Qualitatively Evaluate the Most Attractive Candidates from Quantitative Screens to Determine if a Stock is Mispriced
Intrinsic Value Estimate
- Make Our Most Informed Estimate of “Intrinsic Value” to Determine the “Expected Return Estimate”
Rank Opportunities
- Portfolios are Built with Stocks that We Believe Offer the Highest Expected Return
Buy
Buy
- Significant Discount to True Worth
- >20% Annual Expected Return
- Reliable Thesis Intact
- Catalysts Unfolding
Sell
- Valuation Potential Realized
- <20% Annual Expected Return
- Broken Thesis
- Impaired Catalysts
Sell
Buy
- Significant Discount to True Worth
- >20% Annual Expected Return
- Reliable Thesis Intact
- Catalysts Unfolding
Sell
- Valuation Potential Realized
- <20% Annual Expected Return
- Broken Thesis
- Impaired Catalysts
RISK MANAGEMENT
- Provide margin of safety against permanent loss of capital
- Discount to Sterling Partners Equity Advisors estimate of
intrinsic value (>40%) - Continuous evaluation of thesis and company fundamentals
- Ongoing risk/return analysis
- Specific limits on position sizes
Resource Center
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Forecast 2023: Long-Term Looks Good
Sterling Partners Equity Advisors Portfolio Commentary
Winter 2023Forecast 2023: Long-Term Looks Good Kevin Silverman, CFA
Winter 2023 -
Lessons
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Fall 2022Lessons Kevin Silverman, CFA
Fall 2022 -
Is It or Isn't It?
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Summer 2022Is It or Isn't It? Kevin Silverman, CFA
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Stormy Weather
Sterling Partners Equity Advisors Portfolio Commentary
Spring 2022Stormy Weather Kevin Silverman, CFA
Spring 2022 -
2022 and Beyond!
Sterling Partners Equity Advisors Portfolio Commentary
Winter 20222022 and Beyond! Kevin Silverman, CFA
Winter 2022 -
Productivity to the Rescue!
Sterling Partners Equity Advisors Portfolio Commentary
Fall 2021Productivity to the Rescue! Kevin Silverman, CFA
Fall 2021 -
The Secret Sauce of Total Return
Sterling Partners Equity Advisors Portfolio Commentary
Summer 2021The Secret Sauce of Total Return Kevin Silverman, CFA
Summer 2021 -
All is Good Except For This M2 Chart
Sterling Partners Equity Advisors Portfolio Commentary
Spring 2021All is Good Except For This M2 Chart Kevin Silverman, CFA
Spring 2021 -
Uncertainty is Our Friend… I Think.
Sterling Partners Equity Advisors Portfolio Commentary
October 2019Uncertainty is Our Friend… I Think. Kevin Silverman, CFA
October 2019 -
SPEA QUARTERLY PORTFOLIO COMMENTARY
Sterling Partners Equity Advisors Portfolio Commentary
July 2019SPEA QUARTERLY PORTFOLIO COMMENTARY Kevin Silverman, CFA
July 2019 -
Advantage: U.S. Equities
Sterling Partners Equity Advisors Portfolio Commentary
January 2020Advantage: U.S. Equities Kevin Silverman, CFA
January 2020 -
Three Bad Bears
Sterling Partners Equity Advisors Portfolio Commentary
April 2020Three Bad Bears Kevin Silverman, CFA
April 2020 -
Sterling Partners Equity Advisors Portfolio Commentary
Sterling Partners Equity Advisors Portfolio Commentary
April 2019Sterling Partners Equity Advisors Portfolio Commentary Kevin Silverman, CFA
April 2019 -
2020 Hindsight
Sterling Partners Equity Advisors Portfolio Commentary
Winter 20212020 Hindsight Kevin Silverman, CFA
Winter 2021 -
Problem Solved
Sterling Partners Equity Advisors Portfolio Commentary
Fall 2020Problem Solved Kevin Silverman, CFA
Fall 2020