Summary List Placement
Small-cap stocks have been on a tear recently as positive vaccine news encourages investors to bet on a sped-up economic recovery that will boost smaller US companies’ growth prospects.
We caught up with Brad McGill, a first-percentile small-cap portfolio manager, to learn about how he seeks out companies that he thinks can “generate a minimum of 50% absolute return over two years.”
McGill runs the $313 million Aperture Discover Equity fund, which has returned almost 39% and beaten about 99% of its category peers so far this year, according to Morningstar Data.
His emailed responses to Business Insider are relayed below.
How would you characterize your investment philosophy and process?
At our core, we are long-term investors. The Discover Equity strategy is centered around the idea that small caps have the ability to change dramatically over a 2-4-year time horizon. And as students of business models, we look for companies that are entering into dynamic periods of their lifecycle where they are evolving into their longer-term potential. This positive change and dynamism often result in an acceleration in revenue growth, better margins, and return structure. Our entire investment process is centered around this idea.
In regards to process, we have four key investment criteria that we consider for every potential holding and that we focus our research process through – transformational change/business quality; management, moat, and pricing power; thematic tailwinds; and valuation/ asymmetric risk-reward.
I’ve been a small-cap specialist for most of my career. This has allowed me to develop both a portfolio construction method and a set of investment criteria that allows us to create a true, best-ideas portfolio of equities that we think can generate a minimum of 50% absolute return over two years.
We’ve developed a set of proprietary tools to help scour our investable universe of over 2000 companies in order to select what we believe are the most compelling 20-30 positions. I’ve invested in some extraordinary companies over my career, some of which we saw potential in early and grew into large-cap companies that dominate their respective markets. But that is only one aspect to our approach – we also own niche businesses with good pricing power and margin drivers as well. Ultimately, we run a balanced portfolio of secular growth and cyclical companies – but each one has elements of change and acceleration.
Where are you finding investment opportunities now?
Our expected holding period is 2-4 years. So, while I recognize COVID-19 cases are increasing, I think it is prudent to consider that we are closer to the end of this period of history than the beginning. Therefore, we are able to look out towards the post-COVID era which positions us to invest in companies that may have underperformed during the pandemic but could potentially double or more in the coming years. We refer to these holdings as cyclical laggards.
Can you share the investment thesis behind some of the outperforming stocks/top holdings in your portfolio such as YETI Holdings (YETI), Everbridge (EVBG), and Ingevity (NGVT)?
We often invest …read more
Source:: Business Insider