Small Cap Value Strategy


Baird Equity Asset Management’s Small Cap Value portfolio invests in domestic small-cap companies and seeks to provide superior risk-adjusted returns and consistently outperform the benchmark Russell 2000 Value Index over a full market cycle (typically 3–5 years). The portfolio comprises companies we expect to exceed street expectations and that trade at discounts to our proprietary calculations of fair value. To help control risks, the portfolio is generally diversified among companies in a broad range of industries and economic sectors.

Portfolio Construction

  • A concentrated portfolio of generally 40–50 stocks
  • A market cap range typically from $100 million to $2.5 billion at purchase 
  • Top holdings generally limited to 5% at cost, 8% at market
  • Sectors capped at 30% excluding financials 
  • A buy-and-hold approach

For more information, contact Rob Zwiebel or the Intermediary Specialist in your region.


Q2 2017 Small/Mid Value and Small Value Commentary

Investor expectations continued to be reset during the first half of 2017. At the beginning of the year, the consensus for 2017 was that the reflationary markets and cyclical outperformance that began in 2016 would continue into the new year. Post the November elections, nearly all measures of business, consumer and investor confidence had surged. To date, however, improved sentiment has not proven to have helped economic reality, as illustrated by the Citigroup Economic Surprise Index which ended the period at its lowest level in six years. Perhaps the most consensus trades were that bond yields would continue to march higher and that banks, along with cyclical economic sectors, would outperform the broader market.

Contrary to last November's performance and consensus, this year it has paid to have a portfolio tilted toward defense and quality rather than cyclical and deep value. Just like the second half of 2016, this year's list of winners is dominated by macro themes rather than company-specific variables. Case in point, healthcare in the Russell 2000 Value underperformed bank stocks by 31% in the fourth quarter of last year, but has outperformed banks by 17% in 2017. Utilities lagged energy for the same period by 20%, but have bested energy by 36% this year. 

From our perspective, this is a poignant reminder of why investors should stay disciplined to a well-developed, proven strategy. Effectively managing short-term violent market rotations in an attempt to own what's in favor on any given month or quarter has proven impossible to achieve consistently over the long-run. Even worse, it can result in whiplash from chasing momentum with the chronic symptoms of underperformance, sleepless nights and even negative returns.

The Baird Value Team's strategy is to invest in companies with catalysts that we believe will lead to both strong absolute return and market outperformance over a market cycle. Our macro-economic overlay to the process helps us to identify major inflection points in key economic variables that impact our individual stock selection. We don't attempt to predict what sectors will outperform just next quarter, but what themes will lead to multi-year outperformance. This methodology has led us to deliver superior results over the duration of our track record. 

Read Full Small or Small/Mid Value Commentary