Ironwood Investment Management, LLC has carved out a unique niche in small-cap investing with a focus on its proprietary High Ironwood-Quality, or “High I-Q” companies framework. This approach has contributed to the recent #1 ranking in the PSN Small Cap Core Universe¹ for the firm’s flagship Small Cap Core Strategy, and offers valuable insights into what makes for a potentially rewarding investment opportunity.
Learn more about Ironwood’s track record of success here.
The High I-Q Philosophy
At the heart of Ironwood’s Small Cap Core investment strategy is the belief that equity investments in high quality companies are a powerful means to create wealth over time. But what exactly constitutes a “high-quality” company in Ironwood’s eyes? This is where the concept of High I-Q (High Ironwood-Quality) comes into play. Ironwood’s CIO and Lead Portfolio Manager, Don Collins, puts it succinctly: “We believe High Ironwood-Quality companies have a higher probability of thriving, not just surviving.”
Core Attributes of High I-Q Companies
Ironwood’s High I-Q framework evaluates potential investments through multiple lenses, focusing on both qualitative and quantitative factors. Let’s break down the key attributes they look for:
1. Exceptional Management Teams: The Ironwood Small Cap Core strategy places a premium on leadership. The firm believes that great leaders with an “infinite game” mindset are crucial for long-term success. They look for managers who are accessible, transparent, and aligned with long-term shareholder interests:
- Entrepreneurial and experienced, fostering high-performing cultures
- Skilled at identifying and creating real business optionality
- Thoughtful in their approach to Environmental, Social, and Governance (ESG) issues
2. Excellent Current Market Position and Future Opportunity: High I-Q companies should not just be succeeding today but should be well-positioned for future trends and long-term growth.
- Solid financial condition
- Leading competitive position with an expanding moat
- Sustainable edge in a sustainable business model
3. Strong Products and Services: The strategy’s analysis delves deep into a company’s offerings, taking a holistic view of a company’s products and services ensures that High I-Q companies are not just commercially successful, but also contribute positively to the world.
- Appealing industry structure with multiple opportunities for growth
- Market leadership in established markets and ability to exploit new opportunities
- Value-added content and R&D as a competitive advantage
- Positive societal and environmental impacts
4. Robust Financial Profile: While qualitative factors are crucial, Ironwood doesn’t neglect the numbers. High I-Q companies tend to have the resources and profitability to sustain their growth and weather economic storms:
- Strong balance sheets and the ability to finance growth
- Potential for revenue acceleration
- High and sustainable (or improving and sustainable) gross margins
- Consistent, conservative accounting approaches
5. Sound Governance Practices: As corporate governance continues to increase as a focus area, the Ironwood Small Cap Core strategy pays close attention to the factors that contribute to a company’s long-term governance stability and reduce the risk of ethical missteps or regulatory issues:
- Board structure and composition, valuing diversity, independence, and expertise
- Fair treatment of employees and good labor relations
- Transparent accounting practices
- Equitable treatment of all shareholders
The ESG Dimension of High I-Q
It’s worth noting that the Ironwood Small Cap Core strategy’s High I-Q framework places significant emphasis on ESG factors. Leadership believes that a company’s management of Environmental, Social, and Governance issues plays an important role in its long-term performance.
By integrating ESG considerations into their High I-Q framework, the Ironwood Small Cap Core strategy aims to identify companies that are not just financially successful, but also responsible corporate citizens.
Applying the High I-Q Framework
Ironwood’s Small Cap Core strategy investment process is rigorous. They begin with a universe of stocks with market capitalizations under $5 billion, then apply their High I-Q criteria to narrow down the field. Their team conducts deep research on 10-12 stocks per year, assessing value drivers, conducting ESG reviews, and building valuation models before making investment decisions.
This process results in a portfolio of 60-80 positions, each carefully selected based on their High I-Q attributes. Ironwood’s approach is not just about picking stocks; it’s about identifying companies with the potential to thrive over the long term.
The Power of Patience and Discipline
One of the key strengths of Ironwood’s High I-Q approach is its emphasis on patience and discipline. The firm recognizes that markets often overreact to short-term events and conditions, creating opportunities for investors who can maintain a long-term perspective.
Ironwood’s Small Cap Core strategy involves exploiting volatility to enhance returns. They’re not afraid to buy (and hold) in the face of negative sentiment, recognizing that short-term price movements often diverge from more stable enterprise values, especially in the small cap space.
Conclusion: The High I-Q Advantage
Ironwood’s High I-Q framework within the Small Cap Core strategy offers a comprehensive and nuanced approach to small cap investing. By focusing on exceptional management, strong market positions, quality products and services, robust financials, and sound governance, Ironwood Small Cap Core aims to identify companies that are built to last.
This approach has served the Ironwood Small Cap Core strategy well, contributing to their track record and recent rankings. For investors seeking exposure to the small cap space, understanding Ironwood’s High I-Q philosophy may provide valuable insights into what makes a truly outstanding small cap investment.
In a world where short-term thinking often dominates, Ironwood’s Small Cap Core focus on identifying and investing in High I-Q companies represents a refreshing and potentially rewarding alternative. It’s an approach that not only seeks financial returns but also aligns with broader principles of corporate responsibility and sustainable business practices.
Dig deeper into Ironwood’s Small Cap Core investment philosophy here.
Ready to Elevate Your Investment Strategy?
Explore how Ironwood Investment Management, LLC can help you apply the High I-Q framework to your portfolio. Contact us today [HERE] to learn more about how our expertise can guide you toward long-term success in small-cap investing.
FOOTNOTE
¹Awarded 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
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 the 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.