Paradigm Capital Management has stuck to the same investment focus and philosophy for years: Invest in small-cap markets where inefficiencies lie and seek an edge by getting to know companies and their management teams well. Amid the upheaval of 2020, that knowledge proved invaluable. To find out more from the Equity winner in the Lipper Awards' Small Fund Company category, InvestmentNews Content Strategy Studio spoke with Paradigm CIO Candace Weir and Executive Vice President Amelia Weir. Excerpts from the interview follow.
IN Content Strategy Studio: Paradigm has been investing in small caps for a long time. What do you think differentiates your process and approach in the space?
Amelia Weir: We’re very consistent in what we do. We’ve always been focused on small caps and think that’s where the market inefficiencies and under-researched companies can be found. We generally underweight sectors that are more macro-driven and isolate focus on sectors that lend themselves to bottom-up research and identifying under-appreciated, unfollowed small-cap stocks.
We’re speaking with management teams consistently, without fail, quarter after quarter. We have file notes on companies that go back a decade. That robust research process supports an institutional knowledge base of these companies.
Candace Weir: I would agree that one of our biggest advantages is the cumulative knowledge we build with management teams. We don’t go forward with an investment process if we can’t talk to people at the company beyond the investor relations department. We get to know these teams very well, and they return our calls in the best of markets and the worst of markets. Those management teams might also move on and we follow them to the next company. That’s also been helpful over the years.
IN Content Strategy Studio: How did that institutional knowledge of businesses come into play in 2020?
Amelia Weir: Markets in 2020 reminded us of aspects we saw in 2008 and 2009, when there were massive dislocations in markets and a lot of unknowns. That’s not a time to get to know a company. That’s a time when having preexisting, long-standing dialogues can be most valuable. It’s very hard to take someone at their word in the middle of a crisis if it’s the first conversation you’ve ever had with them. It’s different if it’s the 20th conversation and it’s a key decision-maker at the company.
In Content Strategy Studio: Delving into individual sectors, what was a bright spot for Paradigm portfolios?
Amelia Weir: We’ve been overweight in the technology sector consistently over time and found ourselves in a good spot with semiconductor and capital equipment companies. These are industries that at one time were considered very cyclical and “back end and boring,” but they are at the foundation of some exciting trends. We’re in a new period of technology becoming more prevalent in our lives. Smartphones and other devices are becoming more complex and the content within them is increasing. Automobiles are becoming more connected, and the Internet of Things is changing the industrial manufacturing floor. Semiconductor and capital equipment companies benefit from all those trends.
Candace Weir: The view on those companies ties back to the importance of knowing management teams. We talked to several management teams in the space — CEOs and CFOs that have been in the business 20 or 30 years — and they were all telling us the same thing … that they had never seen demand like this. That gave us a lot of confidence through 2020.
IN Content Strategy Studio: What are your thoughts on equity markets for the rest of the year?
Amelia Weir: By and large companies traversed the past year exceptionally well for such an unpredictable environment, and they continue to navigate it well. Right now, things remain an iterative process. Deployment of the vaccines will be an important catalyst, as we still have industries that are paralyzed. The biggest risk is that there will be a hitch in vaccines or resurgence in Covid-19 that surprises people and adds another inning to the recovery.
Specific to small caps, I would advise investors to stay the course. It’s an area where you absolutely cannot afford to be a market timer. You need to think long term. The asset class will still outperform if you’re a patient, long-term investor.
Candace Weir: I think the fly in the ointment is that inflation will catch up. We’ve heard from company after company saying supply chains are tight and prices are going higher. The question is at what point the Fed feels the need to slow down the easy money policies we’ve been living on. That’s my concern, but it’s not my base case.
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