Manny Weintraub, CFA
Founder, Principal and Portfolio Manager
SMALL CAP DIVIDEND EQUITY
Integre Asset Management’s Small Cap Dividend Equity strategy is a long-only investment strategy that seeks to outperform the Russell 2000® Index with less volatility over a market cycle. The strategy offers the opportunity to participate in the high growth of small caps while limiting downside risk.
The strategy invests in U.S. small cap dividend paying stocks, a subset of the small cap universe which has outperformed non-dividend paying peers over the long term with less volatility. The ability for a small cap company to pay a dividend often indicates the business has reached a certain maturity and stability in its corporate life cycle which can greatly reduce risk while still retaining many of the positive characteristics of a small cap (above average growth, greater market inefficiencies, limited research coverage, etc.). Active stock selection from this unique universe significantly increases the probability of generating attractive long term risk adjusted returns.
The team’s "quantamental" stock selection process begins by screening within the universe of U.S.-listed companies with market capitalizations below $4.5 billion and above $100 million. The team then eliminates firms that don’t pay a dividend or have an unusually high dividend yield. Within the small cap dividend universe, a proprietary screening methodology and fundamental analysis are applied in a disciplined, repeatable process to identify companies trading relatively cheap to their sector peers. Filters related to quality (free cash flow, return on invested capital, leverage), growth (revenue, earnings power, shareholder value creation), and valuation (price/earnings, enterprise value/EBITDA, dividend yield and payout ratio) are applied to the selection process to assess the risk and reward of potential investments. By forecasting an optimistic and pessimistic scenario for a company’s earnings, capital allocation, and valuation, the team looks to identify attractive asymmetric risk to reward profiles.
Despite the focus on dividend paying stocks, the style is balanced between growth and value. Sector weights are maintained within 3% of the Russell 2000®. It does not overweight sectors with more dividend payers, such as financials and real estate, which would lead to a natural value tilt. Instead, the strategy maintains a weighting similar to its benchmark to benefit from historically higher growth sectors such as technology and health care. At least 75% of holdings must pay a dividend.
Integre’s allocation to health care stocks is unique. There is a very small universe of dividend paying health care stocks in the Russell 2000® Index and thus most small cap dividend strategies exclude the sector entirely. However, health care is a defensive, growing sector with above average returns over the past 20 years. Given the limited universe, the firm selects health care companies based on free cash flow generation (with the ability to initiate a dividend) and over 25 years of investment experience following health care.