Bell’s small & mid-cap portfolio – a bellwether

By employing a meticulous and disciplined “bottom-up” stock selection methodology, our partner Bell Asset Management follows a “Quality At a Reasonable Price” (QARP) investment approach. This means investing in high-quality businesses, which are most likely to outperform over the long term, while ensuring that investors do not overpay for them.

The quality SMID-cap segment today is an excellent way to diversify large-/mega-cap stock concentration and an attractive entry point for investors seeking to reduce valuation firm upside potential with recession risk already priced in and strong fundamentals after pandemic-induced rationalisation also make SMID caps a segment worth considering.

The Bell SMID QARP portfolio approach provides:

• Selective diversification with a pick of companies that exhibit an attractive combination of excellent management, franchise strength, superior and consistent profitability, strong ESG characteristics and favourable business drivers 
• Sector diversification as SMID-cap indices tend to have a substantially lower allocation to the IT sector, which makes them far less vulnerable to multiple compression risks 
• Better liquidity and scalability than pure small caps, and no trading capacity constraints 

As Bell expects superior EPS growth in 2024, driven by modest sales growth and margin expansion as a result of waning inflation metrics, Bell  sees SMID-cap companies rerating. Another factor that could make SMID caps particularly attractive is the prospect of interest rates moderating in the second half of 2024. Markets should most likely price these reductions in 3–6 months in advance of them occurring, thereby triggering positive multiples expansion in the least expensive areas of the market – i.e. SMID caps. In addition, if the dreaded US recession fails to materialise and optimism is fuelled, as is often the case, by the US presidential candidates’ spending promises, then SMID caps in a good place.

Those catalysts are further supported by Bell’s approach to quality SMID-cap investing, namely selecting companies with excellent long-term growth opportunities, exposure to established high-quality franchises (which reduces fundamental risk and offers downside protection), an ability to uncover hidden gems, and rigorous discipline about the price paid, which reduces valuation risk.