Risk-Aware: Covering All the Bases
Our enhanced risk focus is also evident in the diversification of our portfolio across sectors, providing us with inherent protection. We do not duplicate businesses; instead, we seek companies that play on different themes, and initially screen out any small caps that demonstrate a lack of growth, poor liquidity, excessive debt, or are located in a region with which we are not familiar.
Levering a track record of outperformance and a depth of asset class expertise with more than $2.4 billion invested in smaller companies,3 our ideas and convictions are informed by a team of five sector specialists, averaging 18 years of industry experience. This collaborative team approach is a true differentiator for BMO Asset Management Global Small Cap Strategy, as not only does it provide an abundance of resources, but also an efficient division of labour that fosters focused areas of specialization. It also further minimizes risk by allowing for the natural – and effective – competition of capital within the small-cap arena, again reflecting true diversification and the broad opportunity set available in the space.
Further, our portfolio decisions are supported by wider teams across our global enterprise, such as BMO’s Governance and Sustainable Investment (GSI) experts, which conduct research on material ESG concerns, such as governance, supply chain management and ethical behaviour, as well as provide post-investment analysis, monitoring and engagement.
Premium Growth, without Excessive Risk: Two Shining Examples
Dechra Pharmaceuticals – a UK-based veterinary pharmaceutical business with an international footprint developing and selling companion food, and animal medicines.
What we like: Dechra operates in an attractive, defensive growth market with limited cyclicality. With an aging population, the number of companion animals are on the rise, resulting in a long runway path of growth ahead. The Company also has strong positions in areas, such as dermatology, endocrinology and equine pharmaceuticals, with an established track record of organic and acquisitive growth and a robust product pipeline. It also benefits from a less costly and faster product development process than human pharmaceuticals, leading to higher rates of return on research and development investment. Dechra is typical of our long-term compounder criteria, complete with compelling intellectual property, balance sheet flexibility, exemplary management capabilities, high barriers to entry, and a diverse product range. Importantly, the Company has assets that carry value – regardless of market conditions.
Vail Resorts – an owner and operator of luxury ski resorts, including Perisher in Australia, Vail and Beaver Creek in the U.S. and Whistler in Canada.
What we like: Vail has a domestic and international customer base, and while it operates these premium ski resorts, it also owns the mountain and respective lodgings, which ensures strong asset backing to the business. While there is a weather factor, most of the Company’s revenues are derived from advanced season-pass sales, which reduces volatility and provides earnings visibility. With a long-term revenue stream and a resilient spend profile, Vail also benefits from a defined M&A strategy that is aiming to drive synergies in its pass systems and to diversify its locations.
History Repeats Itself: Small-Cap Strength to Persist
Looking ahead, the macroeconomic backdrop is generally supportive of smaller-cap companies as a whole, with stock selection remaining a main driver of performance. While rising rates present uncertainty across markets, over the long term, we believe that history will play out, and that small-cap outperformance (relative to large cap) will persist. Though certain pockets of our portfolio currently outshine in terms of performance, including the Real Estate, Consumer Staples and Industrials sectors, we are finding a wealth of opportunities with strong fundamentals and sensible balance sheets across our universe that are likely to hold premium ratings.
Certainly, while macro variables factor into our scenario analysis and portfolio construction, BMO Asset Management Global Small Cap Strategy is ultimately a reflection of our high-conviction stock picks: companies that we believe have successful business strategies and a management team capable of compounding shareholder capital over several years, generating superior risk-adjusted returns.
Amid this increasingly volatile and yield-oriented market environment, the need for growth, while being mindful and aware of overall portfolio risk, is now a main concern for institutional investors worldwide. By extending their global focus to small-cap equities – with an active team like ours distinguished by its specialized expertise, disciplined process and its strong emphasis on consistency and downside risk – asset managers stand to benefit from significant alpha generation, faster growth and enhanced diversification, while remaining protected today, and tomorrow.