September 6, 2023 | U.S. Value Equity
Head of the U.S. Value Equity Team, Portfolio Manager
View Fund:
https://im.williamblair.com/investments/mutual-funds/ismvx-small-mid-cap-value-fund
View Strategy:
https://im.williamblair.com/investments/separate-accounts/small-mid-cap-value
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One of the best parts about being a manager of small-cap benchmarks all the way up to mid-cap benchmarks is following the small-cap value stocks as they grow over time and become quality mid-cap stocks, says U.S. value equity portfolio manager Matt Fleming, CFA, partner. “You don’t really have this effect where just a few companies or a few industries really dominate the benchmark; you really can get broad exposure to the U.S. economy,” he explained.
Below are key points from our conversation with Matt.
We think SMID value offers a very interesting opportunity set because in many ways it’s the best of both worlds.
The larger-market-cap, typically more liquid, and many times frankly just the higher-quality small-cap companies fall in the small side of SMID, in our opinion.
At the same time, you’ve got a lot of great companies that started out as small-cap companies and grew and were successful, so they now populate the SMID-cap universe.
At the upper end, you’re getting a lot of really terrific mid-cap companies that might be temporarily impaired and now have come into the SMID-cap universes, in our opinion.
We think the SMID value strategy is actually a very interesting proxy for small-cap value for a number of reasons. One is the benchmarks are very similar so there is actually a very high correlation among returns. And then from a competitive standpoint, we seek to be very disciplined about keeping the average-weighted market cap of our portfolios at or below the index average.
Said another way, we seek to have a small-cap value strategy that is much smaller than many of the peers, and so our SMID cap strategy actually looks, from a competitive standpoint, very similar to many small-cap peers.
What attracts us to companies first is valuation.
We believe the SMID-cap strategy offers a very interesting opportunity to get exposure to the mid-cap, which we think is a very underappreciated and under-allocated index.
There is an overlap at the upper end of SMID, which is actually the lower end of mid, so we think you’re getting a very nice exposure to the smaller side of mid, which we actually think is the best part. We think that is the least efficient part of mid-cap and offers the best opportunities.
You can invest in some mature mid-cap companies but still really capture the inefficiencies that you see in the small-cap benchmark.
I think the beauty of our process is that it’s very much a bottom-up process, where what attracts us to companies first is valuation. Our views on the economy or industry dynamics, that really comes in at the end when we’re trying to determine what we think the earnings power and the cash-flow-generation power of a company is. So, really in most sectors, we’re trying to find opportunities at any given time.
Right now we’re finding a lot of opportunities in SMID value in stocks that we think are already discounting a recession.
Right now we’re finding a lot of opportunities in SMID value in stocks that we think are already discounting a recession. So, we’re finding names where we think the stocks are already pricing in excessively bearish earnings estimates, or frankly, are just overlooking end markets.
We believe the William Blair SMID-cap value strategy is very interesting because we’ve built a consistent and repeatable process that could potentially achieve similar results over long periods of time.
And having followed these companies for decades, I think it may give us an edge in the marketplace. So, we believe we have a very deep domain expertise. We have a very team-oriented approach, where ideas are introduced to and vetted by the entire team. And, as small-cap companies mature into mid-cap companies, we already know those companies well. So we can potentially be very nimble in executing our ideas.
Said another way, we strive to be patient but not complacent. We try to always be on top of the opportunities that we’re looking for. We’re always seeking the best returns for our investors, at the same time always trying to minimize the risk in a portfolio.
Matthew Fleming, CFA, partner, is the head of William Blair’s U.S. value equity team, on which he also serves as a portfolio manager.
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