I recently had the chance to talk with Brett Reiner, managing director, portfolio manager on Neuberger Berman’s small-cap team. Reiner shared the competitive advantages a large team makes when investing in small- and midcap companies.
Reiner Shares the Competitive Advantages of Larger Teams
The small-cap team at Neuberger Berman defies the industry standard. It boasts 12 members, averaging upwards of 20 years of industry experience. Notably, five members are senior analysts. They bring a depth of knowledge about small- and midcap investing to bear in the strategies they oversee.
It’s the kind of coverage that you don’t necessarily find in the category anymore. “This is an area where active management works and can create alpha in ways that’s frankly just much harder for large-caps,” explained Reiner. That’s “in part because there’s less visibility, less sell-side coverage, which we have. What sell-side coverage is out there tends to be limited and generally done by analysts who are quite junior or new to the industry.”
The firm capitalizes on the size of its team through the level of in-depth analysis it conducts. Reiner noted that the small-cap team averages around 400 meetings each year, between its analysts and senior members of a company’s management teams. In a category where performance disparities are often pronounced, that level of analysis and research may create a competitive edge. It allows for the resources to dig into proxy statements that often contain hidden gems of data, such as compensation metrics or governance issues.
The analysts also delve deep into individual company performance, seeking those that compound growth over time as a return generator. They consider a number of metrics, including reliable free cash flow and elevated profitability, as well as quality. The team pulls, on average, 10 years of historical data for each individual company.
Longer Time Horizons Make a Difference in Small-Caps
The strategy for the Neuberger Berman Small-Mid Cap ETF (NBSM ) focuses on a longer-term basis. “We are a long-term shareholder; our turnover is about 15 to 20%,” Reiner noted. “We are always asking the management teams more about their three-to-five year view rather than their three-month one.”
In a category where many strategies average 80% turnover or higher, NBSM stands out. Beyond just metrics, the management team considers a company’s business model, the industry, individual services and products, and more. It keeps the focus forward-looking, in seeking those competitive advantages that could generate sustainable returns going forward.
“In our mind, we have to determine if we believe something will pass the test of time,” said Reiner. “It might be related to IP a company has on a product, or scale such that they may buy their materials at a lower cost.”
NBSM is actively managed and invests in small- and midcap companies with elevated, sustainable growth potential.
The fund managers use bottom-up analysis when evaluating companies. The strategy focuses on quality companies that generate reliable free cash flow and elevated profitability. The companies also have conservative balance sheets and business models that set them apart from peers. The overall approach to SMIDcap investing results in a diversified portfolio compared to benchmarks.
The strategy also seeks to mitigate the elevated volatility inherent to small- and midcap investing while reducing downside risk. NBSM carries an expense ratio of 0.74%.
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