Daruma invests within a clear set of rules about portfolio concentration and diversification, valuation and the sell discipline — and, most important, rules about paying attention and acting decisively when necessary:
How not to copycat the index
Own no more than 35 high-conviction holdings
Invest in a potential upside/downside of at least three to one
Invest in a potential upside of at least 50% over a two-year period
When a holding declines meaningfully, sell or buy more within 90 days
Do not manage to sector benchmark weights
Make every holding count by starting with a 2% position
How not to inflict mortal wounds on the portfolio
Know what you own
Never let any one holding grow to more than 6% of the portfolio
Own no less than 25 high-conviction positions
Cap our sectors at 25% of the portfolio or two times the Index weight, whichever is greater
The resulting portfolio combines strong return potential with risk control not dependent upon index-hugging. In our longest-running product, the small-cap strategy portfolio turnover has averaged 40% annually since inception; cash typically runs between 3% and 5%, and our top ten positions range between 35% and 40% of the portfolio.
A portfolio is more than just an assortment of stock picks; it becomes an ecosystem — an environment where every organism interacts with and is dependent upon every other organism. The health of the portfolio therefore must be monitored systematically, assessing risks not only at the individual stock level, but also aggregated across the entire portfolio. We always need to make sure that the portfolio has the right mix of new ideas with developing ideas as well as the right balance of risk with opportunity.
The 12-stock rule
The overlap between the small- and SMid-cap portfolios will be no more than 12 holdings
These holdings will be among the larger-cap and more liquid positions
Daruma does not want to own more than 10% of a company’s shares outstanding
Past performance is not a guarantee of future results. Many factors affect performance, including changes in market conditions and interest rates, as well as other economic, political and financial developments. You should not assume that investment decisions we make in the future will be profitable or will equal the investment performance of the past.
The portfolio is actively managed, so holdings, sector weightings and other portfolio characteristics may have changed since the date shown. They should not be considered recommendations to buy or sell any security or of a particular allocation. You should not presume that any holding or allocation shown has been or will be profitable. The information in the Small-Cap and SMid-Cap commentaries supplements the related Composite Presentations available on our website (click here for the Equity Composite Presentation: Small-Cap, here for the Equity Composite Presentation: SMid-Cap).
The information in each commentary is current as of the date of the commentary, and may have changed by the time you read this. Daruma has obtained some of the information in this presentation from third-party sources we believe to be accurate. However, we cannot guarantee the accuracy of such information.
Statements in any commentary that were not historical facts at the date of that commentary reflect our opinions, beliefs or expectations as of that date. Subsequent events will have, or may yet impact whether they prove to be correct.
Charts included in any commentary are included to demonstrate certain information or conclusions. You should not make any investment decision relying only on these charts.
The appropriate comparison benchmark for the Small-Cap Equity strategy is the Russell 2000. The Russell 2000 includes approximately 2000 of the smallest U.S. common stocks based on a combination of their market cap and current membership in the Russell 3000. The Russell 2000 Value Index includes those Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values, while the Russell 2000 Growth Index includes those with higher price-to-value ratios and higher forecasted growth values.
The appropriate comparison benchmark for the SMid-Cap Equity strategy is the Russell 2500. The Russell 2500 includes approximately 2500 of the smallest U.S. common stocks based on a combination of their market cap and current membership in the Russell 3000. The Russell 2500 Value Index includes those Russell 2500 Index companies with lower price-to-book ratios and lower forecasted growth values, while the Russell 2500 Growth Index includes those with higher-price-to-value ratios and higher forecasted growth values.
The Small-Cap and SMid-Cap Equity strategies are concentrated strategies that are not managed to a benchmark, so there are material differences in characteristics, such as the number of holdings and sector and industry weightings. In addition, benchmark performance does not include any fees or expenses. Because of these differences, benchmarks should not be considered a completely accurate comparison.