Micro Cap Opportunities

Strategy Highlights

  • The Micro Cap Opportunities strategy is benchmarked to the Russell Microcap® Index.
  • Upon initial purchase, stocks will generally have a market capitalization of under $2 billion.
  • The Portfolio Manager seeks to exploit inefficiencies that often exist in the valuations of micro cap stocks.
    • Companies at the lower end of the market cap spectrum may have little or no sell-side research coverage, which can lead to pricing inefficiencies.
    • The large size and sector-focused research team provides investment ideas for the strategy.
  • The Portfolio Manager’s objective is to seek micro cap companies with an undervalued catalyst, which can come from a variety of sources including new products/services, that will materially improve its overall return on capital.
    • The aim of the strategy is to focus on early life cycle growers and emerging technology companies.
    • Additionally, the strategy will look for “fallen angels” – companies that were typically much larger in market capitalization that have fallen into the microcap universe with the ability to improve their overall return profile.
  • Portfolios are actively managed using a bottom-up investment approach, and the Portfolio Manager does not attempt to time the markets.
  • Cash is typically less than 5% of the portfolio.
  • Our approach seeks to minimize risk through diversification. Portfolios generally hold between 80 and 125 stocks, with no one stock typically exceeding 10% of the total portfolio.

Objective

The objective of the Micro Cap Opportunities strategy is to consistently outperform the Russell Microcap® Index over a complete market cycle. The Portfolio Manager first identifies micro cap companies (generally under $2 billion in market cap) by seeking companies with a catalyst that are being overlooked by investors. Within that universe, we look for pricing inefficiencies resulting from a lack of Wall Street analyst coverage.

Micro Cap Opportunities | Annualized Returns as of 9/30/2022

† Not Annualized. Source: Advent APX.

Quarterly Fact Sheet

Download a detailed quarterly strategy fact sheet (pdf). Download PDF

Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed.  All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  A complete list of all securities recommended by KCM in the preceding year, a fully compliant GIPS composite report, and the list of composite descriptions are available upon request from KCM at 10829 Olive Blvd., Suite 100. St. Louis, MO, 63141.

Kennedy Capital Management LLC (“KCM”) is a Missouri corporation registered as an investment adviser with the Securities and Exchange Commission under the Investment Advisers Act of 1940.  Registration with the SEC does not imply any level of skill or training. Clients of the Firm include U.S. corporations, pension and profit sharing funds, colleges and universities, trusts, not-for-profit organizations, foundations, and individuals.  KCM claims compliance with the Global Investment Performance Standards (GIPS®).  GIPS® is a registered trademark of CFA Institute.  CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content.  The GIPS® are a set of standardized, industry-wide ethical principles that provide investment firms with guidance on calculating and reporting their investment results to prospective clients to ensure fair representation and full disclosure of an investment firm’s performance history.

The Micro Cap Opportunities Composite contains fully discretionary micro cap accounts that are invested primarily in micro cap companies (market cap generally in line with the Russell Microcap® Index) that have opportunities to grow within their respective markets. For comparison purposes the composite is measured against the Russell Microcap® Index. The U.S. Dollar is the currency used to express performance.

Composite specific data provided within this presentation has been calculated from accounts that are discretionary as defined in this paragraph.  The assets shown are derived only from discretionary accounts. Non-discretionary accounts, as defined by KCM, are accounts that are not included in the composite due to one or any combination of the following criteria: there were significant cash inflows or outflows within the account; the account’s asset level did not meet the minimum requirement to remain in the composite; the account assets are managed by others using our non-discretionary model.  The temporary removal of such an account occurs at the beginning of the month and the account re-enters the composite the month after the criteria has been met.

Returns are presented gross and net of investment advisory fees and include the reinvestment of all income.  Gross of fee returns reflects the deduction of transaction costs and custodian fees but do not reflect the deduction of investment advisory fees.  Net of fee performance is calculated using gross returns less the actual applicable annual management fee applied monthly.  A client’s return will be reduced by the advisory fees as described in Form ADV Part 2A and other expenses incurred by the account.  Past performance is not indicative of future results. For example, an annual advisory fee of 1% compounded quarterly over 10 years will reduce a gross 14.44% annual return to a net 13.32% annual return.  Form ADV Part 2A is available upon request. 

The performance figures reported herein are unaudited, may be based upon information obtained via electronic data sources (”feeds”) and may be subject to change.  Data feeds from many of KCM clients’ selected custodians are obtained through third party, sources and are used to compare custodial data to KCM’s client account records as frequently as daily.  Monthly, KCM reviews clients’ account holdings along with cash and share quantities against the custodial statements.  In some instances, variances may exist between final audited custodial information and the information KCM obtains via such data feeds. Generally, any such variances are researched and reconciled within thirty days of the period end.  

Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto.  The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited.  This is a presentation of Kennedy Capital Management.  Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in Kennedy Capital Management’s presentation thereof.

The Russell Microcap® Index measures the performance of the microcap segment of the U.S. equity universe. Microcap stocks make up less than 2% of the U.S. equity market (by market cap, as of the most recent reconstitution) and consist of the smallest 1,000 securities in the small-cap Russell 2000® Index, plus the next 1,000 smallest eligible securities by market cap. The Russell Microcap® Index is constructed to provide a comprehensive and unbiased barometer for the microcap segment trading on national exchanges, while excluding lesser-regulated OTC bulletin board securities and pink-sheet stocks due to their failure to meet national exchange listing requirements.  The Index is completely reconstituted annually to ensure new and growing equities are reflected and companies continue to reflect appropriate capitalization and value characteristics.

The Russell Microcap® Index is used as the benchmark.  The Index is unmanaged and represents total returns including reinvestment of dividends.  The benchmark is used for comparative purposes only and generally reflects the comparable risk or investment style of the Firm’s strategy.  The investment portfolios underlying the Index are different from the investments in the portfolios managed by the Firm.  Certain accounts may also use other benchmarks not listed in the GIPS composite report.  The Verification and Performance Examination Report does not cover the benchmark returns included in the GIPS composite report.

Sean McMahon

Portfolio Manager, Research Analyst

SEAN MCMAHON, Portfolio Manager for the Micro Cap and Micro Cap Opportunities strategies, Assistant Portfolio Manager for the Extended Small Cap strategy and Research Analyst.  As a Research Analyst at KCM, Mr. McMahon is responsible for selecting and monitoring securities within the health care sector of KCM’s universe.  Sean joined KCM in 2005 after gaining experience in equity analysis through his internship at KCM.  Mr. McMahon earned a B.S. in Business Administration from the University of Missouri – St. Louis and an M.B.A from Washington University.