Currently, SMCP includes about a 90.4% weight in North American equities, along with 2.6% in emerging Africa/Middle East and 7.0% emerging Asia.
“AlphaMark Advisors incorporates a proprietary three-tier cash flow model to identify those companies that we believe can produce reliable cash flow streams and are priced at a level that justifies the growth opportunity,” Simon said.
For example, the small-cap equity selection process starts with companies showing a 20% or greater intrinsic undervaluation, which is then broken down based on price-to-earnings, price-to-book, price-to-sales on operating margin and EV/EBITDA.
Additionally, the small-cap strategy implements a number of factors to achieve a type of active, passive strategy. Once SMCP has achieved alpha, the strategy may revert back to the Russell 2000. If the portfolio outperforms the benchmark index by 5%, the portfolio will go back to its starting universe of Russell 2000 stocks. Then a phantom portfolio will be created from the ETF’s positions and managed the same way as a live portfolio, including buys and sells. Because SMCP is a concentrated fund with high beta stocks, invariably the phantom portfolio’s outperformance will revert to the mean. At this point the Russell 2000 Index inside of SMCP will be sold and the phantom portfolio will be bought back into SMCP thereby creating another alpha-generating opportunity.
“If we try to capture these time periods of excess positive volatility and attempt to reinvest in these periods of mean reversion, while staying fully invested in the benchmark, while waiting for the mean reversion, the potential result could be accumulated excess returns over the benchmark,” Simon added.
Financial advisors who are interested in learning more about small-cap weighted strategies can watch the webcast here on demand.