In today’s financial environment, selecting the right small cap manager is critical. Small cap stocks may offer significant growth potential but can also come with higher risks and volatility. A skilled manager may be able to uncover hidden gems and manage risks in ways that passive strategies or less experienced managers cannot. Moreover, with the increasing focus on sustainable investing and the growing importance of ESG factors, it’s essential to choose a manager who can adapt to these trends while still delivering strong returns.
The following checklist will guide you through the key factors to consider when evaluating a small cap manager.
1. Track Record and Consistency:
- Review long-term performance (e.g., 5, 10, 20+ years)
- Analyze annualized returns over various time periods
- Look for outperformance during both bull and bear markets
- Consider the manager’s performance in relation to their stated objectives
- Check for consistency across different market cycles
- Evaluate performance during economic downturns, recoveries, and expansions
- Look for patterns of outperformance or underperformance in specific market conditions
- Assess the manager’s ability to adapt to changing market environments
- Compare returns to relevant benchmarks (e.g., indices and peer groups)
- Calculate excess returns over the benchmark
- Evaluate performance against peer group rankings (e.g., NASDAQ eVestment universe rankings)
2. Investment Philosophy and Process:
- Understand their approach and philosophy (e.g., growth, value, or blend)
- Determine if the manager has a clear, articulated investment philosophy
- Assess how well the philosophy aligns with your values and investment goals
- Look for unique aspects of their approach (e.g., governance focus, market focus, etc)
- Assess the clarity and consistency of their strategy
- Review investment policy statements and marketing materials for consistency
- Evaluate how well the manager adheres to their stated strategy over time
- Look for evidence of style drift or strategy changes
- Look for a well-defined, repeatable process
- Understand their idea generation and research process
- Assess their decision-making framework for buying and selling
- Evaluate how they construct and manage the portfolio
3. Team Experience and Stability:
- Evaluate the experience of key investment professionals
- Review the background and industry experience of portfolio managers and analysts, specifically in small cap investing
- Look for complementary skills and expertise within the team
- Check for team stability and longevity in the industry
- Evaluate team turnover rates over the past 5-10 years
- Understand the firm’s approach to talent retention and development
- Assess the firm’s ownership structure and alignment with client interests
- Determine if the firm’s interests are aligned: is it employee-owned or part of a larger organization?
- Understand how portfolio managers are compensated and incentivized
- Look for evidence of significant personal investment in the strategy by team members
4. Corporate Governance, ESG, and Research Capabilities:
- Understand how ESG factors are incorporated into the investment process
- Assess the depth and quality of ESG analysis in their research process
- Determine if ESG considerations are used for both risk management and opportunity identification
- Look for evidence of engagement with companies on ESG issues
- Evaluate the depth and quality of their research capabilities
- Understand their approach to fundamental analysis
- Assess their use of quantitative tools or screens in the research process
- Evaluate their access to company management and industry experts
- Look for expertise in niche or overlooked sectors within the small cap universe
- Assess their knowledge in specific industries or themes (e.g., environmental science, engineering)
- Understand how they identify and capitalize on market inefficiencies
- Evaluate their ability to uncover unique investment opportunities
By thoroughly examining these five key areas, investors can gain a comprehensive understanding of a small cap investment manager’s capabilities, approach, and potential for delivering returns.
Ironwood Stands out Amongst the Crowd
While we may be biased, we strongly believe that Ironwood Investment Management, LLC, stands out amongst the forest of investment management firms. And not just for its financial prowess (the firm’s flagship Small Cap Core strategy ranked #1 in the PSN Small Cap Core universe in Q1 2024¹ and ranked #1 in the NASDAQ eVestment database in the Small Cap Core universe for the 1H 2024), but also for its lasting commitment to ethical standards and potential growth.
Ironwood Investment Management, LLC, founded in 1997 and based in Boston, has carved out a niche by blending robust financial acumen with a dedication to ethical practices. Learn more about the firm and dive deep into the Small Cap Core investment philosophy for a thorough understanding of what makes Ironwood unique.
Ready to Find the Right Small Cap Manager?
At Ironwood Investment Management, LLC, we believe in and practice a disciplined, research-driven approach to small-cap investing. The firm understands that selecting the right manager in today’s dynamic market is critical. Our team combines extensive experience with a commitment to ethical practices, focusing on delivering consistent returns while navigating market complexities.
If you’re looking for a partner who aligns with your values and investment goals, we invite you to explore our Small Cap Core strategy.
We look forward to partnering with you on your investment journey.
Contact Us for a Consultation [HERE] to schedule a call with our team to discuss your unique investment needs.
FOOTNOTE
¹ Awarded May 21, 2024. PSN is not a client, and no compensation was paid or received in exchange for the ranking. Register for free to view the full PSN Top Guns recipient list and award methodology: PSN Top Guns: https://psn.fi.informais.com/.
PERFORMANCE DATA AND DISCLOSURES
Remember: Choosing the right small-cap manager is an important decision. Use this checklist to guide your evaluation and make an informed choice that aligns with your long-term financial goals.
Disclaimer: Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.
Performance Statistics as of 6/30/2024
Ironwood Investment Management®, LLC (Ironwood) is an independently managed investment advisory firm providing investment advisory services to institutional clients, mutual funds and high-net-worth clients. The firm is a registered investment adviser with the Securities and Exchange Commission. SEC Registration does not imply a certain level of skill or training. Accounts in the Small Cap Core composite include separately managed, fully discretionary, fee-paying portfolios. Portfolios are invested in undervalued securities, the majority of which will have market capitalizations under $2.5 billion at cost, including securities with growth and/or value characteristics. Securities are considered undervalued when management believes the current share price does not accurately reflect the long-term economic value of the underlying company. Ironwood Investment Management, LLC claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Ironwood Investment Management, LLC has been independently verified for the periods January 1, 1999 through December 31, 2021. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. The Small Cap Core composite has had a performance examination for the periods July 1, 2002 to December 31, 2021. The verification and performance examination reports are available upon request. GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. The creation date of the composite: July 2002. Performance inception date of the composite: January 1, 1999. Prior to July 2002, portfolios were included in the composite when at least 75% of the portfolio was invested in equity securities and when at least 75% of the portfolio was invested according to the investment style of the composite. Subsequent to July, 2002, portfolios are included in the composite after the first full month of being fully invested. Returns are presented gross and net of management fees and include the reinvestment of all income. Net returns are calculated based on the highest fee of 1.00%. Investment management fees are 1.00% on the first $25 million, 0.90% on the next $25 million, 0.80% on the next $50 million, and 0.75% over $100 million on an annual basis and a client’s return will be reduced by these and other related expenses. The actual fee charged to an individual portfolio may vary by size and type of portfolio and may be negotiated. Actual investment advisory fees incurred by clients may vary. The Russell 2000 Index consists of the 2000 smallest stocks in the Russell 3000 Index that represents approximately 8% of the U.S. equity market capitalization. The indices have been reconstituted annually since 1989. Ironwood returns and Index performance reflect reinvested interest income and dividends, in U.S. dollars. A list of composite descriptions and a list of limited distribution pooled fund descriptions are available upon request. Past performance is not indicative of future results. Policies for valuing investments, calculating performance and preparing GIPS Reports are available upon request. Prior to May 2006, the Firm was known as Ironwood Capital Management, LLC.