At the end of 2022, the Crawford Small Cap Strategy celebrated its eleventh birthday. We are proud to report that over this period, the strategy delivered on its objective of providing investors with market-beating returns and below-market volatility. While, during the past decade, the small cap segment of the market has experienced a number of pendulum shifts, the Crawford research team has remained true to the core tenets of its philosophy. This includes investing only in high-quality, dividend-paying companies and maintaining a long-term perspective.
And the numbers speak for themselves: for the eleven years ending 12/31/22, the portfolio generated an annualized return of 10.27% (net of fees), which compares favorably to the Russell 2000 Index’s return of 9.66%. Importantly, we believe our investors have enjoyed a much smoother ride as the volatility of the Small Cap strategy, measured by the standard deviation of quarterly returns, was almost 20% lower than that of the Russell 2000 Index. For more detailed return information, please see the strategy fact sheet.
One of the most important decisions we made was to emphasize quality using the dividend as an indicator of business strength. This is one of the more durable and pertinent factors in our experience as investors. While Crawford has never yielded to the temptation to sacrifice quality for short-term performance, we have continually evaluated our research process and portfolio construction efforts with an eye toward creating an optimal framework that, in our opinion, yields the best possible investment outcomes.
Position Sizes. We originally envisioned the Small Cap strategy as a largely equal-weighted portfolio of 60 – 70 stocks. After a couple of years of maintaining this weighting scheme, we realized that a more nuanced approach would lead to better investment outcomes. Having tried out a two-tier system (1% or 2% position sizes), we settled on a more flexible methodology where the portfolio manager ultimately determines position sizes for individual stocks within the bounds of 0.5% and 2.5% after taking into account analyst recommendation, portfolio needs, and the team’s overall conviction level. This approach allows us to quickly size positions up or down due to valuation changes, which can be quite rapid in the small cap space. It also gives us the ability to hold higher conviction names at more meaningful weights. Additionally, we were able to pursue attractive investment opportunities at the lower end of the liquidity spectrum and purchase promising businesses early in their lifecycles.
Market Capitalization. Another evolutionary change to our research process was the increase in market cap thresholds for portfolio holdings. We initially limited our investable universe to stocks with market capitalizations below $3.5B with the intention for stocks to remain in the portfolio until they reached $7.5B in value. Over time, we have increased those limits to the current $5B maximum for initial purchase and $10B maximum for existing holdings. Similarly to the change discussed earlier, this adjustment has increased our flexibility, broadened the opportunity set, and allowed us to stay with our “winners” for longer, which ultimately enhanced investor returns while lowering portfolio turnover. Importantly, these benefits were achieved without sacrificing our overall small cap mandate as the weighted average market capitalization of the portfolio remained at or below the peer average.
Today, we are exploring other conventions that we believe could lead to better and more informed decision making. We have a risk model that is being utilized as yet another input into our process. This helps us better understand portfolio exposures such as beta and interest rate sensitivity, among others.
After a decade of success, we remain vigilant with respect to the ever-changing investment landscape and the best portfolio management practices. Crawford Small Cap investors can rest assured that we will continue to update our investment process in a thoughtful manner while maintaining our unwavering commitment to owning high-quality businesses with attractive growth characteristics.
Disclosures:
Crawford Investment Counsel (“Crawford”) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Crawford, including our investment strategies, fees, and objectives, can be found in our Form ADV Part 2and/or Form CRS, which is available upon request.
The opinions expressed are those of Crawford. The opinions referenced are as of the date of the commentary and are subject to change, without notice, due to changes in the market or economic conditions and may not necessarily come to pass. There is no guarantee of the future performance of any Crawford portfolio. Crawford reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.
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