September 18, 2023 | U.S. Value Equity
Bridging the Gap with Small-Mid Value
Speakers
Portfolio Manager
Head of the U.S. Value Equity Team, Portfolio Manager
Featured Fund
ISMVX
View Fund:
https://im.williamblair.com/investments/mutual-funds/ismvx-small-mid-cap-value-fund
Featured Strategy
View Strategy:
https://im.williamblair.com/investments/separate-accounts/small-mid-cap-value
Watch this video online:
https://youtu.be/yrUuatYQvfk?si=_fSxbtCek1En0bje
Transcript
I think one of the nice parts about being a manager of small-cap benchmarks all the way up to mid-cap benchmarks is that we can follow the small-cap value stocks. And the good stocks eventually will grow value over time and become quality mid-cap stocks. So, 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.
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 companies fall in the small side of SMID. 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 mid-cap companies that might be temporarily impaired and now have come into the SMID-cap universe.
A Proxy for Small-Cap Value?
We think the SMID value product 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 are very disciplined about keeping the average-weighted market cap of our portfolios at or below the index average. And so, said another way, is we have a small-cap value product that is much smaller than many of the peers, and so our SMID cap product actually looks, from a competitive standpoint, very similar to many small-cap peers.
Exposure to Mid-Cap Value
The SMID-cap product 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.
Opportunity Set
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 finding 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. 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.
Our Edge
We believe the William Blair SMID-cap value product is very interesting because we’ve built a consistent and repeatable process.
And having followed these companies for decades, I think it really gives us 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 be very nimble in executing our ideas.
Said another way, we’re patient but not complacent. We’re always seeking the best returns for our investors, at the same time always trying to minimize the risk in a portfolio.
Filmed August 2023
The views and opinions expressed herein are those of the speakers as of the date of publication, are subject to change without notice as economic and market conditions dictate, and may not reflect the views and opinions of other investment teams within William Blair. Factual information has been obtained from sources we believe to be reliable, but its accuracy, completeness, or interpretation cannot be guaranteed. This material may include estimates, outlooks, projections, and other forward-looking statements. Due to a variety of factors, actual events may differ significantly from those presented. This video has been provided for informational purposes only and should not be considered as investment advice or a recommendation of any particular strategy or investment product, or as an offer to buy or sell any securities or related financial instruments in any jurisdiction. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions. Investing involves risks, including the possible loss of principal. Equity securities may decline in value due to both real and perceived general market, economic, and industry conditions. The securities of smaller companies may be more volatile and less liquid than securities of larger companies. Different investment styles may shift in and out of favor depending on market conditions. Past performance is not indicative of future results.
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