Q&A Series

Our ongoing Q&A series features Raymond James Investment Management affiliate managers sharing their diverse investment philosophies and thoughts on the market.

Patrick Dunkerley, CFA Q&A with Patrick Dunkerley, CFA
Lead Portfolio Manager, Scout Mid Cap Equity Strategy, Scout Investments

March 2020

Scout Investments has been offering mid-cap products since 2006. The asset class represents an often-overlooked opportunity for investors. Investors may think they have the mid-cap space covered with a combination of large- and small-cap managers, but there is more to this asset class.

Why choose a mid-cap-only manager?

Mid caps have outperformed their small- and large-cap peers since 1979. The chart below shows the growth of an investment in small-, large-, and mid-cap stocks over that period. Mid-cap investors saw the strongest returns; however, roughly half of the market capitalization of the Russell Midcap® Index may not receive adequate exposure in a client’s portfolio.1 We view this as an overlooked space where investors may find opportunity. We also believe mid-cap companies offer the best risk/reward characteristics over time and are poised to continue their competitive performance.


Growth of $10K Investment in large-, mid-, and small-cap stocks (1/1/1979-12/31/2021)

Growth of $10K investment in large-, mid-, and small-cap stocks 01/01/1979 to 06/30/2022

Source: Morningstar data as of 6/30/2022

PHILOSOPHY: How is your team uniquely qualified to handle this asset class?

Our team chemistry is a big plus. Co-Portfolio Managers Derek Smashey and John Indellicate have been with the Scout Mid Cap team since the team’s 2006 inception. Co-Portfolio Manager Jason Votruba and Senior Investment Analyst Eric Chenoweth joined the team in 2013 and 2017, respectively. Scout’s unique disciplined investment process and flexible valuation approach can make us attractive to investors. We incorporate top-down macroeconomic and company-specific analysis with an emphasis on quality. We have a philosophy of letting our winners run when it’s to our clients’ advantage. Team members focus their research on specific sectors of the market. We spend time analyzing risk factors of the stocks we own, especially before quarterly earnings reports. This is another advantage of active management versus passive.

PROCESS: How does your team choose stocks?

Scout uses a “toolbox approach”: utilizing different tools to select stocks during bull and bear market cycles. The team incorporates a good understanding of the macroeconomic picture when positioning sector weights. Our bottom-up research checklist helps identify companies with good fundamentals. We buy stocks based on their fundamentals and quality characteristics while giving due consideration to the valuation. If their fundamentals weaken, that’s when we act decisively and sell.

CAUTIOUS OR CONSTRUCTIVE: How does Scout’s bimodal valuation process work?

Scout Mid Cap’s bimodal valuation process allows the portfolio management team to value stocks differently depending on whether the team is more constructive (“bullish” outlook) or more cautious (“bearish” outlook) on the markets. During a bull market, the team uses a discounted earnings model because we are more confident in the markets. We want to reward future earnings growth in order to enhance as much upside in the market as possible. During a bear market, we employ more traditional measures of relative value (price-to-book, price- to-sales, etc.) in an attempt to minimize downside risk.

When analyzing a stock in a bull market, we focus on the upside potential as the fundamentals tend to look attractive and investors tend to give more credit to future growth. Alternatively, when fundamentals aren’t as attractive, investors grow increasingly pessimistic. When that happens we take the opportunity to focus on statistical measures of cheapness in an effort to seek a measure of downside protection.

Moreover, it is important to note that the team may view certain sectors/industries through a more cautious lens, while simultaneously viewing others more favorably.

ABOUT Scout Investments

Scout Investments’ teams employ distinct investment philosophies and processes to pursue long-term capital appreciation objectives that are consistent with client goals. Our thoughtful long-term approach seeks quality companies with strong fundamentals, growth tailwinds and proven management teams.

To learn more about Scout Investments click here or contact us at 800.521.1195.

Scout Investments, Inc. is a registered investment adviser that offers investment management services for both managed accounts and mutual funds. Scout Investments is a wholly owned subsidiary of Carillon Tower Advisers, Inc.

Risk Considerations:
Investing in mid-sized companies is based on the premise that relatively smaller companies will increase their earnings and grow into larger, more valuable companies. Historically, mid-cap stocks have experienced greater volatility than other equity asset classes, and they may be less liquid than larger cap stocks. Thus, relative to larger, more liquid stocks, investing in mid-cap stocks involves potentially greater volatility and risk. In addition, mid-cap stocks have experienced greater volatility than other classes of securities. Mid-cap stocks can also be less liquid than those of large companies, and illiquidity increases the potential for volatility. As with all equity investing, there is the risk that a company will not achieve its expected earnings results, or that an unexpected change in the market or within the company will occur, both of which may adversely affect investment results. The biggest risk of equity investing is that returns can fluctuate and investors can lose money. Not every investment opportunity will meet all of the stringent investment criteria mentioned to the same degree. Trade-offs must be made, which is where experience and judgment play a key role. Accounts are invested at the discretion of the portfolio manager and may take up to 60 days to become fully invested.

Past performance does not guarantee or indicate future results. The information presented is for a representative account and for illustrative purposes only and should not be used as the sole basis for an investment decision. Actual account holdings will vary depending on the size of an account, cash flows within an account, and restrictions on an account.

1As of 3/31/2022, according to Russell data as presented by Factset Portfolio Analytics, the market capitalization of the Russell Midcap® Index was $11.783 trillion. The top 200 largest companies of the Russell Midcap Index had a market capitalization of $6.295 trillion, making up 53.42% or over half of the Russell Midcap Index.

The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 10% of the total market capitalization of the Russell 3000® Index.

The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap represents approximately 26% of the total market capitalization of the Russell 1000 companies.

The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index, which represents approximately 93% of the total market capitalization of the Russell 3000® Index.

The Russell Top 200® Index measures the performance of the 200® largest companies in the Russell 3000® Index, which represents approximately 67% of the total market capitalization of the Russell 3000® Index.

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