An Overlooked Opportunity
Is your equity portfolio one-size-fits-all? While most investors maintain an allocation to equities, they tend to concentrate on large-company stocks. This can cause them to miss out on the increased growth potential of small and midsized companies.
Improve the Risk-Reward Tradeoff
Small/Mid Cap (SMID) mutual funds describes an investment style that blends small and mid-cap stocks in a single portfolio. The goal is to pursue the higher growth potential of small stocks while using the historically greater stability of medium-sized companies to help lessen volatility.
- Small-cap stocks can be diamonds in the rough or not. The possibility of finding the next big thing offers outsized rewards, but comes with the risk of failure. Smaller companies may suffer more when the economy or their industry slows down, but they can post significant gains.
- Mid-cap stocks are more seasoned businesses that have established themselves in their market, yet still offer room to grow. These companies tend to have stronger balance sheets and offer greater profitability than smaller startups. And they have more growth potential than mature large companies.
Capitalize on Inefficiencies
Generally, the smaller the company, the fewer the analysts who follow it. This lack of reliable sources of information presents opportunities for experienced stock pickers. Actively managed SMID mutual funds have the potential to find hidden treasures that Wall Street may be ignoring.
SMID Funds May Offer Unique Advantages
Funds that invest in both small and mid-cap companies actively seek to exploit the inefficiencies of these market segments relative to large caps. Combining these two strategies into a single fund can help you:
- Pursue growth: SMID funds offer exposure to the growth potential of both small-cap and mid-cap stocks in one comprehensive portfolio. These funds seek to deliver an attractive risk-reward profile that balances the increased volatility of small and midsized stocks with the greater upside these names have historically delivered.
- Seize opportunities: SMID funds can take advantage of a much larger opportunity set than single-segment funds. Using active management and fundamental research, these funds seek to find the best of the best across market capitalizations, industry groups and investment themes. Additionally, smaller companies tend to be more attractive targets for acquisitions, typically at a premium to their stock price.
- Stay flexible: SMID managers have the freedom to hold on to winning small-cap stocks that are at or approaching mid-cap size but are still viewed as attractive. A small-cap manager would have to sell a name that grew too large, and a mid-cap manager would have to pass up a growing company that didn’t reach the fund’s minimum size.
- Enhance diversification: SMID funds allow you to expand your equity portfolio beyond large-cap stocks. The addition of small- and mid-cap names and sectors may make your portfolio more resilient during times of market stress.
We believe that successful small- and mid-cap growth investing is best achieved by:
- Leveraging an experienced and disciplined team
- Identifying companies with sustainable growth duration
- Using “Profit Themes,” economic and demographic tailwinds drive faster growth
- Maintaining a robust risk management framework
Dreyfus/The Boston Company Small/Mid Cap Growth Fund offers diversified exposure to both small- and mid-cap (mainly U.S.) growth stocks in one portfolio. We seek to invest in SMID companies that we believe have the ability to sustain or accelerate growth rates over the long run and generate significant alpha at attractive levels of risk.
We Emphasize Growth Duration
Growth duration describes the length of time a company can sustain or increase its growth rate before experiencing a decline due to factors such as competition or pricing changes. We look for names that can maintain their growth for much longer than one or two quarters.
Thematic Investing Sets Us Apart
Identifying and monitoring long-term investment themes is a key part of our investment process. We never lose sight of the bigger picture—the most dominant trends that we believe will impact the economic landscape in the coming years. The team evaluates stocks for the fund based on their participation in these market-shaping trends.
We group our investment themes into stages, from Emerging to Established to Maturing. Frontier themes are those that could be significant in the future but are early in their maturation phase.
We believe that SMID investing offers a significant opportunity for investors to pursue capital appreciation at reasonable levels of risk.
To learn more about SMID investing and Dreyfus/The Boston Company Small/Mid Cap Growth Fund, please call 1-800-DREYFUS (373-9387).