Sponsored by Carillon Tower Advisers 

James McBride, CFA, Lead Portfolio Manager

How would you categorize your approach to small cap investing?

We believe secular growth trends that evolve over extended periods of time are prime drivers of superior returns in the small-cap growth space. Our investing philosophy has been around for 20 years and helps us to stay focused on those long-term secular economic drivers while staying away from parts of the market that are growing slower than nominal GDP.

Another key component to our differentiated approach is our focus on profitability. We do not buy companies that are not profitable or that do not have a very clear path to profitability over the next several quarters. This part of our process makes the strategy very different from not only our benchmark but our peers as well, since at any given time a material part of the Russell 2000®

Growth Index (40% or thereabouts in early 2019) is comprised of unprofitable businesses. Industries like biotech and software, which combine to comprise roughly 25% of the index as of early 2019, are dominated by companies that do not turn a profit and that have no path to profitability in the foreseeable future. Since we invest based on longer – three- to five-years but typically longer – secular growth trends, we dramatically reduce the normal turnover of the portfolio to generally less than 25%. This reduces trading costs, including bid/ask spreads, commissions and market impact. By focusing on the long term, we remove short-term trading driven by the latest headline.

Why is active management so important to this strategy?

An active manager is important in this space because there is less analyst coverage with small-cap companies, which drives more inefficiencies. You also have more variation with smaller companies. Active management helps uncover these discrepancies.

In addition, because so much of the Russell 2000 Growth Index is unprofitable, if you buy the index, you are buying a lot of low quality businesses and taking on a lot of unnecessary risk.

Where do you see opportunities? Is there a specific sector you favor?

We spend a lot of time thinking about this topic: What will drive growth as we look into the future? More often than not, the secular trends we track lead us to find an abundance of opportunities in healthcare and information technology. While other sectors may rely more heavily on cyclical behavior, we believe healthcare and information technology provide truer long-term growth through both exciting innovation and strong demographic tailwinds.

It is no surprise that the long-term secular growth trends we believe will drive performance over time (Aging Demographics, Shifts in Consumer Preferences, Shifts in Business Practices, and Technology Advancements) lead us to find ample opportunities in these sectors.

How do you manage risk?

Small caps can be volatile due to their limited liquidity, so it is important not to take on any unintended risks. It can be easy and appealing to chase hyper growth, but we believe a focus on high quality, profitable businesses will help to mitigate a lot of the risk inherent in small-cap investing.

Our Dynamic Valuation Methodology serves as a guidepost to determine a stock’s intrinsic value. A multi-factor regression model is used to determine fair value; with a bias toward valuation-model drivers (e.g., profitability and growth). While our model does provide us with an actual numerical output, we do not employ a “black box” approach to valuing stocks – rather we use this output as a guidepost in our process of determining the attractiveness of a stock’s price.

Meanwhile, if a stock becomes overvalued, we would look at selling the position. If management changes focus on markets that may not match up with one of our long term trends, we would consider that a negative. Any type of M&A that doesn’t meet our long term objectives would be a concern. Clearly management execution is also key. Finally, we generally like to keep positions less than 3% and market caps less than $10B.

What is your outlook for the remainder of the year?

We will continue to focus on higher quality companies with stronger balance sheets, good returns and profitability. We firmly believe that this part of the market will eventually reward investors. Higher quality wins out in the long run, though that outperformance tends to be lumpy, with the majority of the returns coming in very short bursts of time as we saw last fall during the market pullback.

As far as themes, there are always new trends we are exploring, and one we will continue to focus on is millennials’ increased buying power and influence over different parts of the economy. Several of the underlying aspects of one of our major trends, Shifts in Consumer Preferences, show the role of millennials’ growing clout, including:

  • Shifts to alternative forms of payment
  • Implementation of wireless products and the Internet of Things
  • e-Commerce
  • Growth of social networking as a communications platform

We expect to find a growing number of ideas and opportunities because of this trend.


There is no guarantee the portfolio will meet its investment objectives. All investments involve risk, including the possible loss of principal.

Due to the limited focus, small-cap investing is more susceptible to market volatility because smaller companies may not have the management experience, financial resources, product diversification and competitive strengths of larger companies. Additionally, smaller company stocks tend to be sold less often and in smaller amounts than larger company stocks.

Real Estate Investment Trusts (REITS) may be affected by economic conditions including credit risk, interest rate risk and other factors that affect property values, rents or occupancies of real estate. Foreign investments present additional risks due to currency fluctuations, economic and political factors, government regulations, differences in accounting standards and other factors. Investments in emerging markets involve even greater risks.

Groups of stocks, such as value and growth, go in and out of favor which may cause certain funds to underperform other equity funds.

The Russell 2000® Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.


About Carillon Tower Advisers

Carillon Tower Advisers is a global asset management company that combines the exceptional insight and agility of individual investment teams with the strength and stability of a full-service firm. Together with our partner affiliates – ClariVest Asset Management, Cougar Global Investments, Eagle Asset Management, Reams Asset Management (a division of Scout Investments) and Scout Investments – we offer a range of investment strategies and asset classes, each with a focus on risk-adjusted returns and alpha generation. Carillon Tower believes providing a lineup of institutional-class portfolio managers, spanning a wide range of disciplines and investing vehicles, is the best way to help investors seek their long-term financial goals.

About Scout Investments

At Scout Investments, we are selective about everything we do. For more than three decades, our portfolio managers have actively managed a distinct suite of equity strategies with a focus on choosing quality investments. The firm’s thoughtful approach to asset management extends to how we cultivate long-term client relationships and to how we execute our strategies.

SR19-0277 Exp. 1/31/2019

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