The Fund invests primarily in micro-cap, small-cap, and mid-cap stocks with market capitalizations up to $5 billion. It also may invest in both long and short positions, though it has been a long-only portfolio throughout most of its history.
Portfolio ProcessTypically investing in less than 100 positions, the Fund is a limited portfolio that looks for companies with underlying financial strength. Portfolio Manager Lauren Romeo uses a disciplined value approach by emphasizing the following metrics:
- A strong balance sheet
- High returns on invested capital
- Strong free cash flow
- An established history of earnings
- A durable business model
The goal is to buy companies when perception of the nature of their struggles is worse than their financial or operational reality; such perceptions often cause a company’s valuation to decouple from its intrinsic value. Throughout the firm, we want to buy when companies are trading at a 30-50% discount to our estimate of their true worth. Doing so gives us a measure of assurance that a company’s share price is reflecting both bad news and low expectations when we are considering a purchase.
This phase of the vetting process, then, sees us working to determine whether a business is out of favor for cyclical or temporary, company-specific reasons that are fixable (ideally within a short time period), which would allow the company to return to normalized earnings power over time, or whether there is a structural change that has permanently altered its business so that previous successes may not be achievable going forward.
Lauren’s methodology also often centers on a search for “emerging quality.” These are companies that have the potential to boost their returns on invested capital to above-average levels due to a change in either their industry’s structure—consolidation leading to a more rational competitive environment, for example—or at the company level, such as a new management team, divestiture of an underperforming asset, or exiting an unprofitable line of business.
Important Performance and Expense Information
All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 180 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained here. Operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees and other expenses.
1 Average return shown is the average of all month-end trailing one-, three-, five-, and 10-year total returns.
We have been pleased with the Fund’s long-term results on an absolute basis. While on a relative scale the Fund has underperformed of late, its results in monthly rolling return periods have been terrific. On a monthly basis, the Fund outperformed the Russell 2000 in 100% of all 10-year periods, 96% of all five-year periods, 85% of all three-year periods, and 66% of all one-year periods.
For 100% of the periods, the Fund’s 10-year average annual total returns were greater than 5%, and for 93% of the periods, 10-year average annual total returns were greater than 10%.
Important Disclosure Information
This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. The Fund invests primarily in micro-cap, small-cap, and mid-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Fund may sell securities short which involves selling a security it does not own in anticipation that the security's price will decline. Short sales present unlimited risk on an individual stock basis since the Fund may be required to buy the security sold short at a time when the security has appreciated in value. The Fund also invests primarily in a limited number of stocks, which may involve considerably more risk than a less concentrated portfolio because a decline in the value of these stocks would cause the Fund's overall value to decline to a greater degree. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Fund may invest up to 15% of its net assets in foreign securities, which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.) Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. The Russell 2000 is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.