Summer 2022: the funds gaining and losing their Elite Ratings
Following FundCalibre’s summer investment committee, three new funds have gained an Elite Rating...
T. Rowe Price US Smaller Companies Equity
T. Rowe Price US Smaller Companies Equity has a flexible approach. The manager looks for both growth and value opportunities in the small and mid-cap space, to build a diverse portfolio of the best ideas from the vast analyst resource at his disposal. The manager will allow his winners to run as long as he still believes there is a return opportunity. As such, the portfolio is likely to have more of a mid-cap bias than its peers and it will also invest in areas such as biotech, which other generalist funds often avoid.
Our opinion
This fund differs from the usual T. Rowe Price mould in that it is a more balanced core portfolio, with value names in addition to the usual growth focus. This approach has borne fruit, with considerable performance coming from stock selection. Curt is very detail-orientated and has been working at T. Rowe Price as a specialist analyst for many years, allowing him to build up a large knowledge base of the US smaller companies universe. He was also an associate manager on the fund before taking over, and we believe it should continue to prosper under his leadership.
Company description
Founded in 1937, T. Rowe Price is one of the world's largest investment managers and was awarded the Elite Provider for Equities Rating each year from 2016 to 2021. Fundamental research is at the heart of the T. Rowe Price approach, with more than 200 in-house analysts dedicated to equity and fixed income research. Experienced and stable fund management teams are a key feature of the firm.
Fund manager
Curt Organt has been at T. Rowe Price for 24 of his 26-year investment career. He took over the T. Rowe Price US Smaller Companies Equity fund from Ryan Burgess in January 2019 and, before that, he was an industrials analyst, working specifically in the smaller companies team. Prior to this, Curt was employed by DAP Products, Inc., as a financial and marketing analyst. He holds a BSc in finance and philosophy from LaSalle University and an MBA from Wake Forest University. Curt also holds the Chartered Financial Analyst (CFA) designation.
Matt Mahon, investment analyst, joined Curt as co-portfolio manager of the strategy effective 1 September 2023. As co-portfolio managers, Matt and Curt work as partners, and there will be a team approach to all aspects of the portfolio management and oversight of the strategy in the coming 12 months. Effective 30 September 2024, Curt will retire from T. Rowe Price and Matt will become the strategy’s sole portfolio manager.
Matt’s has been with T. Rowe Price since 2016, beginning in the T. Rowe Price Associates, Inc., US Equity Division. Prior to this, Matt was employed by Water Street Capital, Inc., a long/short equity hedge fund seeded by Tiger Management, for four years as an investment analyst. Before joining Water Street, Matt was employed by Morgan Creek Capital Management, LLC, as an analyst.
I try to focus on the quality of the business. In good times, that’s important. In tough times, it’s essential.
Curt Organt Fund manager
Investment process
T. Rowe Price has a very defined approach to fund management. It has a large and experienced in-house analyst team that is dedicated to sectors and geographies to provide in-depth fundamental research. This fund is a ‘best ideas’ strategy that levers off this research (as well as that of industry contacts and external brokers), building a portfolio of the strongest ideas from across a range of sectors in the US across the small and mid-cap space. This means that the manager will buy a diverse set of stocks that have both value and growth characteristics, but are likely to be the winners over the next 5 plus years.
Curt, with the support of around 40 analysts, will conduct intense fundamental analysis, looking at different factors for different types of stocks. This work has a heavy emphasis on free cash flow generation with sound or improving financial leverage. Curt will also want management teams whose goals are aligned with shareholders, a solid plan for the business and a track record of delivering in the past. On top of this, he will need to see a near-term catalyst to improve the fundamentals of the business, either in its earnings or its valuation. Curt will have the highest conviction in ideas were there is a compelling investment opportunity due a combination of the company’s prospects and its current valuation.
For the value ideas, he will look at what the company’s issue is, the time frame for resolution and the absolute and relative valuations. These stocks won’t be those that are structurally challenged, but those that are under pressure for cyclical reasons. They will be firms that still have an enduring competitive advantage, but are cheap for an external factor, such as industry related reasons. The growth names are more likely to be those with a stable growth outlook and sustainable underlying growth drivers, rather than riskier aggressive plans.
Given the fund’s large scope for finding ideas, the final portfolio will be reasonably diverse at around 150-200 stocks. This also helps with risk management by limiting the impact of any one name on the portfolio and allows Curt to buy firms such as biotech companies and a group of regional banks to take exposure to certain themes, without adding single stock risk which can occur in these names.
ESG
ESG - Integrated
The manager of this fund actively considers environmental, social and governance factors to enhance investment decisions, but they are not the sole driver of an investment decision, nor are they considered separately from more traditional analysis. T. Rowe aims to strike a balance between risk and return in its investment process, and the company approaches ESG considerations in the same manner, considering both financial and non-financial risks.
The strategy’s portfolio manager works collaboratively with investment analysts and with T. Rowe’s internal ESG resources to develop an understanding of the key ESG considerations, and to weigh their significance against other aspects of the investment opportunity. The foundation of the analysis is a proprietary flagging tool called the Responsible Investing Indicator Model (RIIM) which covers approximately 14,000 securities, for potential inclusion in the portfolio.
Risk
The portfolio will have broad sector diversification to manage the risk and volatility usually associated with small-cap investing, with bottom–up stock selection determining sector weights. The flexible approach helps mitigates style concerns, with the fund able to perform in both value and growth markets.
The information, data, analyses, and opinions contained herein (1) include the proprietary information of FundCalibre, (2) may not be copied or redistributed without prior permission, (3) do not constitute investment advice offered by FundCalibre, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a fund, and (5) are not warranted to be correct, complete, or accurate. FundCalibre shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use. The Elite Fund rating is subjective in nature and reflects FundCalibre’s current expectations of future events/behaviour as they relate to a particular fund. Because such events/behaviour may turn out to be different than expected, FundCalibre does not guarantee that a fund will perform in line with its FundCalibre benchmark. Likewise, the Elite Fund rating should not be seen as any sort of guarantee or assessment of the creditworthiness of a fund nor of its underlying securities and should not be used as the sole basis for making any investment decision. FundCalibre disclaims any responsibility for trading decisions, damages or other losses resulting from any use of the Elite Fund rating. All performance data, as well as fund size, OCF, AMC, annual income (historic), share price discount or premium, is sourced directly from FE Analytics, and will change periodically.