Transcending Volatility in Small Cap Growth

Brian C. Fitzsimons, CFA

Director of Small Cap Growth Strategies


Small Cap Growth

While investing in the U.S. small cap growth space provides the opportunity for attractive returns, this space is also fraught with greater volatility. In a short video, learn how the SBH Small Cap Growth team capitalizes on this inefficiency and seeks to preserve capital in down markets.

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1. What inefficiencies exist in the small cap growth space?

Investing in the U.S. small cap growth universe provides the opportunity for attractive returns; however, the universe is comprised of many less mature growth companies that have the potential to exhibit greater volatility in their business fundamentals and therefore greater volatility in stock prices.

2. How does your investment approach capitalize on the inefficiencies of volatility in the small cap growth space?

First, we utilize an extensive stock-specific research process designed to help identify companies with fundamentally stable growth characteristics. These companies can grow sales and cash flows at a higher rate and more consistently than their peers that exhibit more volatility in these metrics. We focus on these types of companies because they have historically delivered higher returns with less risk compared to peers with less stable growth characteristics and to the overall small cap growth universe.

The second way we seek to capitalize on the volatility is by making the sell decision just as important as the buy decision. We use three primary tools to guide our sell decisions—in-depth fundamental analysis of risk, rigorous valuation modeling, and a proprietary risk screening tool—we call it our “check engine light”. This tool systematically flags stocks at risk of underperforming due to fundamental deterioration in sales growth, earnings quality, return on capital and a company’s competitive advantage. Erosion in these factors can lead to stock price volatility and underperformance which is why the sell discipline is such an important part of our process.

IMPORTANT DISCLOSURE INFORMATION The opinions expressed in this video are solely the opinions of Segall Bryant & Hamill. You should not treat any opinion in this video as specific inducement to make a particular investment or follow a particular strategy, but only as an expression of the manager’s opinions. The opinions expressed in this video are based upon information the manager considers reliable, but completeness or accuracy is not warranted, and it should not be relied upon as such. Market conditions are subject to change at any time, and no forecast can be guaranteed. Any and all information perceived from this video does not constitute financial, legal, tax, or other professional advice and is not intended as a substitute for consultation with a qualified professional. The manager’s opinions and statements are subject to change without notice and Segall Bryant & Hamill is not obligated to update or correct any information in this video. For illustrative purposes only. Segall Bryant & Hamill does not provide accounting, legal or tax advice. This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for accounting, legal, tax or investment advice.

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