Performance By Design: Lord Abbett’s Smid-Cap Value Strategy
Performance By Design: Lord Abbett's Smid-Cap Value Strategy
Thomas B. Maher
Partner & Portfolio Manager
Justin C. Maurer
Partner & Portfolio Manager
WHAT'S A SMID-CAP?
Yeah, we get that - we get a question about that all the time. SMID value is a combination of small- and mid-cap value. And you know, a lot of people talk about a style box. I always say, that we actually have kind of a style rectangle, since we spread across small-cap stocks, as well as mid-cap stocks.
Small- and mid-cap obviously is what it stands for. But it's just the ability for us to have the flexibility to take advantage of market opportunities.
When we think about our process, and what it brings home for us is downside protection, and the participating in up-markets is really what we try to compound on a daily basis.
You know, within an investment portfolio - to the extent you're looking for exposure to very actively managed small- and mid-cap exposures, where that company level research is really going to count. This is potentially one strategy that can give you access to both those parts of the market.
JUSTIN MAURER:We firmly believe in our process, and you know, the near decade that we've been employing that on this strategy - that we've produced risk adjusted returns. And then that's the kind of key phrase here is, risk adjusted, particularly with a lot of the events we've seen and lived through the last decade - is to do that in a thoughtful way - protecting client assets - but also, allowing those assets to grow, when the market affords us the opportunity. And that's something that we buckle in, and do every day - consistently, day in, day out.
As practitioners, we're very engaged.
Our active share is very high, so we're looking at these individual companies - and looking at the characteristics, and what the opportunity is for success - measuring that on a daily basis. Also, looking at risk/reward - and changing the portfolio dynamically based on that. The number of names, as we think about the portfolio, tends to run somewhere between 75 and 100 names. So, you really are getting actively managed product, with a keen focus on risk/reward in what we do.
We don't feel like we have to own all parts of the market at all times. So, when you think about index orientation and again, passive strategies where - you're going to own a certain amount of a sector, regardless of circumstances. That's not what we do.
I think we have a unique approach. I think it's an interesting asset class, if you will. I think that the track record shows that it works.
Justin and I have to think about the portfolio in the context of the greater macro scene, what's going on in the markets, what's the risk appetite like out there? But - but we're really trying to find those differentiated companies. So, it's a very company by company built portfolio, with Justin and I sort of overlooking the whole process, and determining whether or not it's a cohesive portfolio that matches our view.
Because we're obviously small- and mid-cap investors, we tend to be more company specific in portfolio construction, how we think about the world.
So, we talk about the companies that we own, [that] typically fall into one of three categories. One is transformation, where the company is really changing its business model, or some aspect thereof. One is a turnaround, where you have companies that have gone through some kind of hard times, and perhaps are kind of getting their footing again. And then the last part is really trajectory, which, you know, is a combination - it's not necessarily just high growth, but if there's an improvement in growth coming through, that's something that the market tends to reward, once they can recognize it. So, we try to figure that out before the market has - through intensive fundamental research.
But that's not to say, particularly in the last number of years, post-financial crisis, where we're thinking also about central bank moves, and those type of other issues - macro consequences, whether it's oil prices, or, you know, the dollar in those instances. We never say [that] we try to predict those things. That's not the game that we're in. But we have to at least acknowledge factors such as those, as we think about what the impact is on those investments we have.
Very much a team-oriented process. Because we sit next to each other, it's very easy to pop into each other's office, as well as, as Tom said, the rest of the team, and just look for those updates.
We want to keep each other informed on the updates - whether or not we feel the stories are coming through as expected or not. And whether or not we need to take actions on those positions.
We're all generalists by nature, so even though there's five analysts and the two of us as co-managers - you know, we're spending plenty of time, both individually and as a team, looking at different parts of the market. So, it's not necessarily each analyst or the two of us has to have a cookie-cutter approach.
We might want to take advantage of some weakness to buy some more on an opportunity. Or, in great cases, the stock has appreciated to our target, and we're looking to sell it. So - you know - it's a collaborative process, so we're always going to sit down and kind of hash that out together to determine what's the best investment decision.
ONE MORE THING
Justin and I have both been in this business for a couple of decades now.
It's so engaging. There's no such thing as monotony in this business. Because of the information flow, and not only companies we currently own, but those we're considering - there's always a flurry of activity, each and every day.
Something that comes with experience, is that sort of sense when you've sort of uncovered something that isn't yet fully recognized by the market, or not recognized at all. And I think, you know, it's very exciting what we do when you get it right.
Yeah, it keeps things fresh.
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Active Share is a methodology used to evaluate a fund's actual performance and volatility against a benchmark. The methodology is not an indicator of how a specific investor's investment will perform. This should not be used as a tool or evaluation in making any investment decision. We strongly recommend that you consult with your financial advisor before making an investment decision. Neither diversification nor asset allocation can guarantee a profit or protect against loss in declining markets.
A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Mid- and small-cap company stocks tend to be more volatile and may be less liquid than large-cap company stocks. Mid- and small-cap companies also may have more limited product lines, markets, or financial resources, and typically experience a higher risk of failure than large companies. The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall.
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