By following the conventional wisdom of a barbell portfolio — that is, one with large-cap and small-cap stocks — investors are missing out on the strength of midsize companies, according to Michelle Clayman, manager of the Calvert Capital Accumulation Fund Ticker:(CCAFX).
“Midcap names tend to be more stable and less volatile than small caps, but they also tend to have a higher growth trajectory than large-caps because they are earlier in their growth stage,” she said. “Midcaps can also be attractive [acquisition] candidates.”
Ms. Clayman, a portfolio manager with New Amsterdam Partners LLC, manages the $200 million fund on a subadvisory basis for Calvert Investment Management Inc.
Her strict focus on midsize companies concentrates on those names with market capitalizations of between $1 billion and $9 billion.
Once a stock is in the portfolio, however, she will let a company grow to the $15 billion range before starting to trim the position.
Even though the fund adheres to all the socially responsible investing screens established by Calvert, Ms. Clayman starts with a universe of approximately 800 names, which are evaluated initially for growth potential.
The social screens are applied last.
The GARP, or growth at a reasonable price, style includes a lot of “very nitty-gritty accounting” research, she said.
This includes a fundamentally based checklist on areas such as revenue recognition policies, cash flow analysis, balance sheet analysis, debt levels, debt maturity schedule, governance issues and litigation.
“Because of all that research, this tends to be more of a quality portfolio,” she said. “We're also looking for companies where our earnings estimates are higher than the Street's, and where the earnings revisions are going up.”
The portfolio of 40 stocks is slightly overweight the Russell Mid-Cap Growth Index in the health care, utilities and telecommunications sectors.
The fund is slightly underweight the index in the information technology and consumer discretionary sectors.
The small rejiggerings have helped goose performance. Year to date, the Russell Midcap Growth Index is up 11.7% while the Capital Accumulation Fund is up 15%.
The largest company in the portfolio is AmerisourceBergen Corp. Ticker:(ABC), an $11.2 billion pharmaceutical services company.
Three other stocks in the fund have market caps of just over $10 billion, including chemical producer FMC Corp. Ticker:(FMC), retailer Nordstrom Inc. Ticker:(JWN), and clinical testing company Laboratory Corp. of America Holdings Ticker:(LH).
On other end of the spectrum, the two smallest stocks in the portfolio are $1.5 billion Chemed Corp. Ticker:(CHE), and $1.3 billion communications services firm j2 Global Communications Inc. Ticker:(JCOM).
Chemed Corp., a hospice care provider, is an example of what you can find when researching stocks off the beaten path.
Ms. Clayman described the company as a “hybrid model.”
While the company is mostly made up of hospice and nursing care operations, about a quarter of the company's stock is in Roto-Rooter Group Inc., a company that specializes in sewer line cleaning for homeowners, businesses and municipalities.
“A lot of people have always been underexposed to midcaps,” Ms. Clayman said. “In our view, midcaps are a good place to look for a source of alpha.”
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