U.S. Small & Mid-Cap

Seeks to find the best domestic small and mid-cap companies built for the long term

To learn more about our U.S. Small and Mid-Cap strategy, please watch the brief but insightful introductory video below...

Then simply scroll down to get a more in-depth look at everything from this strategy's goals and objectives... to who this strategy is designed for... to the particular portfolio management process it incorporates.


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U.S. Small & Mid-Cap SMA: Philosophy and Strategy

The U.S. Small & Mid-Cap Strategy pursues its investment objective by investing primarily in common stocks of companies based in the United States that are engaged in a broad range of industries. Under normal market conditions, we'll invest at least 80% of our net assets (plus the amount of any borrowings for investment purposes) in securities issued by U.S. companies.

The U.S. Small & Mid-Cap Strategy employs a nonstatistical, value-based investment approach and seeks long-term growth of capital by acquiring securities of companies at prices we believe to be significantly below their intrinsic value (by "nonstatistical," we simply mean that we do not place limits on the types of companies we can buy). While statistical-value investors might say they would only buy companies at a price-to-earnings below some set level or a price-to-book below 1, we believe any company that is cheaper than it should be is a value.

We seek to beat the market over the long term, which requires that we employ unconventional methods. We are not attempting to beat the market over the long term by consistently beating it over the short term. Our philosophy demands careful selection of securities, painstaking research, and patience. Oftentimes we will be investing in companies at the very time that the market has identified (and presumably overreacted) to something that is wrong with them. We are not attempting to scalp for a few pennies. We are fishing in deeper water than that.

Our model is somewhat simple. We seek to buy companies that are trading below what we believe they are worth, have good balance sheets, offer superior competitive advantages, and are run by smart, honest people. We make these determinations solely through our own proprietary research, including visiting the companies themselves.

Although the model contemplates investing in companies that are technically large-capitalization stocks, and can hold foreign stocks, the managers expect that we will only buy companies that fit our investing criteria. We have built in carve outs so that we are not forced to sell a company in the event that it grows to be defined as a large cap, or if corporate events cause a current holding to be reclassified as foreign.

Consequently, under normal market conditions, the portfolio will comprise small and mid-cap companies based in the United States. For this purpose, the portfolio managers define large-capitalization companies as the largest 200 companies in the U.S. by market capitalization, as calculated and ranked at the end of each calendar quarter by a third-party aggregator of market data, such as Bloomberg or Reuters. We generally invest in companies that possess attractive balance sheets and high internal rates of return. The portfolio managers believe that investors in the small and mid-cap model should have a long-term investment horizon of at least three years.

Portfolio Management Process

We are long-term investors looking to find companies that we can own for many years to come, so you should not anticipate much activity on a day-to-day basis. If you think about it, a three-year holding period would correspond to our turning over the portfolio a maximum of 33% per year. We hope to do a lot better than this, as taxes and trading costs such as commissions and spreads are real expenses.

On the other hand, we cannot anticipate when a stock will surpass our estimate of full value, nor can we anticipate when an even better opportunity might come along. So we will be maintaining, tweaking, and updating our positions in the portfolio based on our estimates of fair value and on each company in our portfolio. We may not be in any hurry to sell a stock that appears overvalued, but instead we may consider that position to be a source of capital for new or better ideas, which we define as companies that offer better risk/return profiles.

For portfolio management purposes, we limit our exposure to any one holding to 8% of the portfolio's total value. While we do not intend to invest in all industries at any one time, we will not put more than 40% of the portfolio into any one industry, so that we might limit our exposure to any exogenous factors (or our own errors in judgement).

Investors should recognize that liquidity is often lower in smaller-capitalization stocks, which sometimes manifests itself as higher volatility than with larger, more efficiently traded companies. While we are cognizant that many investors find high levels of volatility discomforting, you should understand that we do not seek to dampen the volatility in this sleeve of the portfolio, as we believe fully that optimized investing in smaller-capitalization companies demands that we seek out misunderstood (and therefore potentially more volatile) positions. Our view is that risk is best measured by the potential for a permanent loss of capital. As such, investors should be well aware of the nature of the investments to which they will likely be exposed.

Account minimums may apply. All investments involve risk and may lose money. MFWM makes no assurance that investment objectives will be met. Clients should be aware that their individual account results may not exactly match the performance of the Model Portfolios. Past performance is no guarantee of future results.

Motley Fool Wealth Management retains the right to revise or modify portfolios and strategies if it believes such modifications would be in the best interests of its clients.

Portfolio Managers

Charly Travers, Jr. Bill Barker, CFA

Investment Objectives

The investment objective of the U.S. Small & Mid-Cap Strategy is to achieve long-term capital appreciation. The model pursues its objective by investing primarily in common stocks of U.S. companies. We seek to earn market-beating returns by searching for high-conviction, high-quality companies among the small and mid-cap companies based in the United States.

Who Should Invest

We believe that all long-term investors benefit from investing in smaller and mid-cap companies in the United States, as they tend to be less followed than their large-cap peers. Since the adoption of Regulation Fair Disclosure in 2000, the number of companies in the United States that have more than one Wall Street analyst covering them has dropped precipitously. We believe that this lack of coverage lowers the level of efficiency in pricing among smaller companies, as evidenced by their wider price swings relative to their larger compatriots. In time, investors with a significant enough time horizon should benefit from being able to buy (and sell) at advantageous points in time.

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