The BL American Small & Mid Caps Fund celebrated its fifth anniversary in November.

The Fund recently turned five. How are things looking?

At launch, our goal was to give investors access to a particularly buoyant segment of the US equity market through the typical BLI approach, which consists of investing in quality growth stocks with an emphasis on valuation and reducing downside risk.
A little over five years later, the Fund has found its feet. Assets under management have increased significantly, reaching USD 671 million at the end of April 2021.
In terms of performance, results are also very satisfying: from launch to April 2021, the Fund (B units) gained 135.2% beating the MSCI US Small + Mid NR, which was up 113.5%1. Even more importantly, this performance came with limited volatility, giving the Fund a particularly attractive risk/reward profile.

In a market led by the tech giants, how do you manage to stand out?

The last few years have been tough for managers focused on smaller caps. At BLI, we find most of our quality stocks in the technology, health and industrial sectors, as well as the two consumer sectors. Our sector allocation may differ greatly from that of our official benchmark.
Without going into too much detail, our solid relative performance can mainly be attributed to particularly good stock-picking and a bias towards mid caps.

Another way in which our approach differs is the combination of high growth stocks (making up the core portfolio) and solid companies with lower beta. This reduces risk and gives the Fund a more defensive growth profile, making it more resilient to downturns.

Why invest now in US mid caps?

Most investors believe that, historically, small cap companies have outperformed large cap companies. And that’s true. But, in the United States, it is actually the mid cap companies that have shown the strongest historical performance.
And very interestingly, if we consider volatility, mid cap companies are a little more volatile than large cap companies, but much less volatile than small cap companies. Therefore, the risk-adjusted return profile has historically been highest and most attractive in the mid cap space.
It is also surprising to see that, despite these undeniable qualities, investors are continuing to significantly underweight this segment of the market, even though these companies are at the optimal point of their life cycle, being sufficiently established to avoid certain risks inherent to small caps, yet still offering considerable upside potential.

If we step back and analyse the historical performance of the mid cap segment, we see that growth stocks along with quality stocks (healthy balance sheet, long-term competitive edge, high returns and profitable growth) deliver the best performance.

So although it is always hard to time the market, I think that, in the long run, all investors should take advantage of this attractive segment. And in the shorter term, if you look at when small and mid caps fare best, it’s actually during the first few years of a cycle following a recession. If you take the last ten recessions, small caps outperformed large caps every time the recession ended. If history were to repeat itself, then the current situation would present an interesting entry point.

Watch the whole of the interview to find out more

BL American Small & Mid Caps fact Sheet