Small Cap Select – Q1 2022 Commentary

The Market In General:

The market experienced a volatile first quarter of 2022.  Investors contended with inflation data that continued to come in ahead of expectations and a US Federal Reserve that finally began to intervene by raising interest rates.  Unfortunately, the Russian invasion of Ukraine has thrown another piece into the economic puzzle.  The European war has resulted in sanctions, currency fluctuations, and supply chain challenges that have generally pushed commodity prices higher, creating another layer of complexity for corporations and markets.  While these headlines garnered the most attention, it is important to state that other economic trends remain quite favorable including low unemployment, positive wage growth, and strong aggregate demand.

While we are focused on the fundamentals of our individual investments, we always consider the macroeconomic environment.  During the quarter, we did adjust several position sizes to account for risks and opportunities in these volatile times.  Importantly, this dynamic period allowed us to find exciting long-term investment ideas which are detailed later in the letter.


For the first quarter of 2022, the Select Composite experienced a return of -8.82% (gross of fees) and -9.02% (net of fees) as compared to the Russell 2000®, which returned -7.53%.  Certain account performance may vary from this composite performance due to client-initiated account restrictions on certain types of holdings or due to client cash flows.

The Industrials sector was the largest area of relative underperformance during the quarter.  Several of our holdings struggled with inflationary pressure on their input costs and supply chain challenges.  While we believe that many of these headwinds are temporary since the companies continue to price through higher costs, they did impact near-term corporate profits, and the stocks reacted negatively.  Our largest individual underperforming stock was a company that leases durable goods .  The company saw a worsening credit profile of their customer base and adjusted their lending criteria which will impact future growth and profits.  We have since sold the position as our thesis of expanding their digital lease-to-own offering to other retailers and ecommerce providers did not come to fruition.

The Health Care sector was our best relative performing sector.  While this sector experienced negative returns, we benefitted from both being underweight and posting stronger returns than the benchmark.   Our best individual performing name was a company that provides contract oil and gas drilling services to energy companies.  With the rise in oil and gas prices, they have seen an increase in demand, and subsequently, improved pricing on their drilling rigs.  This has resulted in much stronger profit projections over the coming quarters.  We remain invested here.

Portfolio, New Investments, and Positions Exited:

The portfolio is currently underweight cyclical investments as compared to the Russell 2000® benchmark.  During the quarter, we increased our weighting in the Health Care sector while reducing our exposure to Consumer Discretionary.   As of March 31, 2022, we are overweight Information Technology, Consumer Discretionary, and Health Care, while we are underweight Utilities, Energy, and Materials.

The Future:

Inflation, and the extent to which the US Federal Reserve responds to it, will continue to be top of mind for investors.  These forces can surely pressure markets, but we believe it is important to remember that current underlying economic data remains strong.  This can be seen in continued economic growth, a low unemployment rate, and rising wages.  We could also see deflationary forces at work as the labor participation rate continues its improvement and the worst of the pandemic-induced supply chain challenges subside.  If the Fed succeeds in reducing demand on the margin, the worst of the inflationary pressure could be tamed.

As for small cap equities, we see the set up as favorable.  Compared to large cap stocks, small caps’ trailing twelve-month returns have lagged considerably.  Also, small cap price-to-earnings valuations, compared to their large cap peers, are amongst the lowest levels in over two decades.  Most importantly, the fact that we continue to find compelling investments, gives us cause for optimism.

There is no doubt that this is a dynamic market environment.  We are acutely aware of the macroeconomic condition and make sure we factor that into our investment theses.  But, as always, we look for individual investments that can execute on their own catalysts to create value.  We are confident that this environment will provide compelling investment opportunities.

Thank you for your continued confidence in us.  Should you have any questions or concerns, never hesitate to call.


Alex Mosman, CFA®

Portfolio Manager

Please click here for Important Disclosures.

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