en-US Small-cap specialists. Experienced managers with expertise in small-cap financials earn the strategy a People rating of Above Average.
The managers trace their roots to the strategy’s 1998 reformulation as a financial-services product. Comanager Kenneth Mertz, a 40-year industry veteran and president/CIO of Emerald Advisors, has been a permanent fixture. When Emerald’s current owners acquired the firm in 2018, Mertz signed a five-year lockup, so he’ll be here for at least three more years. He works closely with Steven Russell, who comanaged the strategy in its first three years. After a stint at his own asset-management firm, he returned to Emerald in 2006 and resumed comanager duties here in 2012.
Both are manager-analysts. Mertz focuses on insurance, REITs, and macroeconomics. Russell focuses on banks and travels widely to meet management teams on their home turf, generally having about 100 such meetings annually. The extensive travel schedule provides visibility into small- and micro-cap stocks off the radar of larger investors and is the primarily source of ideas.
A two-person team might sound small but it’s typical for other financials-sector medalist funds. Mertz and Russell also leverage other members of Emerald’s 16-person investment team for additional research, usually in more tech- or consumer-oriented businesses like financial technology or payment processors.
Built around regional banks. As of February 2020, 75% of assets were in regional banks, while 80% of assets were in stocks with market caps below $1 billion. As a result, the portfolio straddles the line between the small- and micro-growth Morningstar Style Boxes, which creates some liquidity risk. Managers Kenneth Mertz and Steven Russell mitigate it by taking small positions, typically 0.5% to 2.0%, and stopping short of owning more than 5% of a firm’s outstanding shares.
The flip side of these constraints is that there aren’t many places to park new money. The portfolio’s number of holdings has risen and fallen along with the strategy’s size. While the managers target 90-120 equity holdings, the portfolio spiked from 106 in July 2016 to 133 in January 2017 as assets flowed in after the U.S. elections. Other spikes occurred in early 2010 and the first half of 2013 when the strategy had under $100 million in total assets. They’ve since cut back, with the number of holdings hovering around 80 since late 2018.
Some eclectic names diversify the portfolio at the margins. The largest nonbank holding as of February 2020 was Innovative Industrial Properties IIPR, a REIT specializing in medical marijuana facilities. Mining firm Kirkland Lake Gold KL provided indirect gold exposure. The team recently bought payment processor Repay Holdings RPAY because of its innovative autopayment solutions and dominant position in the space.
Suitable but not without drawbacks. A boots-on-the-ground approach has its strengths but also some weaknesses, warranting a Process rating of Average.
Comanagers Kenneth Mertz and Steven Russell cast a wide net in their hunt for small-cap financials, but primarily focus on U.S. banks with market caps between $50 million and $2.5 billion. Other financial-services companies (such as REITs, financial technology, or insurance) are usually of peripheral interest and are often discovered in talks with bank managers. With hundreds of small banks in the fund’s investable universe, site visits (about 100 per year) play a central role in the managers’ research process. These meetings include interviews with management, board members, customers, and vendors–all part of a regimented approach to find the best names. They like banks that dominate their local market and can take share from rivals while maintaining underwriting discipline.
However, the focus on such small businesses has its drawbacks. It can create some liquidity risk, which is managed through prudent position-sizing. Flows sometimes present a challenge, too. As money entered in 2015-16, for example, the managers added about 50 holdings (20 in 2015 and 30 in 2016) to park those assets. They’ve since pared back as flows subsided, cutting down to about 80 holdings from a peak of more than 130 in early 2017. Such dramatic moves can alter a strategy’s performance profile.
The strategy’s focus on small- and micro-cap financials, especially banks, makes for a specialty role. Specialty A fine option in its niche, at the right price. Continued confidence in Emerald Banking and Finance’s experienced managers warrant upgrading the Morningstar Analyst Rating for its cheapest share class to Bronze, while the rest remain Neutral.
The strategy benefits from managers with deep knowledge of small-cap financials, especially regional banks. Kenneth Mertz has managed the strategy since October 1998, when the current approach was implemented, and has worked with comanager Steven Russell since he rejoined Emerald in 2006. Both are manager-analysts and complement each other. Mertz specializes in insurance, REITs, and macroeconomic data, while Russell focuses on banks. They draw on other analysts at the firm when needed and are adequately resourced compared with other financials sector Morningstar Medalists.
Their approach is notable for its consistent focus on small- and micro-cap banks, a niche where independent analysis can make a difference. Extensive travel and management meetings provide good visibility into businesses generally below the radar of larger funds and not covered by sell-side analysts. The managers extend this advantage with a long-term investment horizon. Turnover here averaged 39% over the past decade, versus 106% for the financials Morningstar Category. However, significant concentration–about 70% to 80% of assets are in regional banks–ties the fund’s performance to that of the industry and narrows the range of scenarios in which it can excel. It also creates some liquidity risk, which is managed through conservative position-sizing.
The strategy’s significant overweight in small-cap regional banks held back returns in recent years as they struggled against larger competitors. From October 1998 through March 2020, the strategy’s 7.2% annualized return beat the financial category’s 4.2% but slightly lagged the S&P 600 Financials Index’s 7.5%–which comes closest to matching the strategy’s bank exposure. Risk-adjusted returns beat the category and lagged the index by a few basis points.
The Bronze-rated institutional shares are a solid choice for a pretty pure play on small banks.
2326 2326 Eric Schultz Eric Schultz A new owner has let Emerald operate fairly independently. The firm keeps its Average Parent rating.
In October 2018, 1251 Capital Group–a small financial-services holding company founded in 2014–took a 51% stake in Emerald while leaving the rest of the firm in employees’ hands through its ESOP. The deal gave Emerald more distribution resources and locked up its portfolio managers for five years but otherwise left investment operations untouched. 1251 co-founder Michael Wilson previously invested in asset managers at Affiliated Managers Group and TA Associates and seeks to build a similar portfolio at 1251. Emerald is so far its only acquisition. Help with distribution is still in the early stages.
Emerald has tried to diversify its product lineup without success. In recent years, the firm acquired direct-lending and exchange-traded fund businesses, but both failed to scale and were quickly shuttered. Another acquired strategy’s paltry–and declining–assets raise doubts about its viability. However, Emerald’s legacy strategies, which focus on small- and micro-cap growth equities in separate accounts and mutual funds, are stable. Flagship Emerald Growth as well as Emerald Banking & Finance still hold nearly all the firm’s assets.
With supportive long-term owners, Emerald has a chance to refocus and build the business on its strengths.
Room for improvement under new ownership. 2020-04-20T11:20:00 2020-04-20T16:20:00Z Tied to regional bank performance. From the strategy’s October 1998 reconstitution as a financials-sector product through March 2020, its 7.2% annualized return beat the financial category’s 4.2% but slightly lagged the S&P 600 Financials Index’s 7.5%; this index best matches the strategy’s small-cap bank exposure. Similarly, risk-adjusted returns beat the category and lagged the index by a few basis points. Regional banks usually account for 70% to 80% of assets here and despite the narrow industry focus, the strategy hasn’t been more volatile or prone to collapse in down markets. During the same period, its volatility–as measured by standard deviation–was lower than both the category and the index. It has also held up better in most, but not all, drawdowns.
The long-term record suffers somewhat from current headwinds. In recent years, regional banks underperformed their larger-cap competitors that benefited from scale, diversification, and technological advantages. This dynamic was evident in the fund’s bottom-decile performance in 2018 and 2019, when regional banks struggled as the Federal Reserve paused its rate hikes and questions swirled about the strength of the U.S. economy. Regional banks were it hard again in the 2020 correction. The index fell 45.2% from its Jan. 2 peak to its March 23 trough, while the strategy declined 46.6% because of its characteristic overweight in regional banks.
It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s middle quintile. That’s not great, but based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will still be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze. F00000NJ70 A fine option in its niche, at the right price. Continued confidence in Emerald Banking and Finance’s experienced managers warrant upgrading the Morningstar Analyst Rating for its cheapest share class to Bronze, while the rest remain Neutral.
The strategy benefits from managers with deep knowledge of small-cap financials, especially regional banks. Kenneth Mertz has managed the strategy since October 1998, when the current approach was implemented, and has worked with comanager Steven Russell since he rejoined Emerald in 2006. Both are manager-analysts and complement each other. Mertz specializes in insurance, REITs, and macroeconomic data, while Russell focuses on banks. They draw on other analysts at the firm when needed and are adequately resourced compared with other financials sector Morningstar Medalists.
Their approach is notable for its consistent focus on small- and micro-cap banks, a niche where independent analysis can make a difference. Extensive travel and management meetings provide good visibility into businesses generally below the radar of larger funds and not covered by sell-side analysts. The managers extend this advantage with a long-term investment horizon. Turnover here averaged 39% over the past decade, versus 106% for the financials Morningstar Category. However, significant concentration–about 70% to 80% of assets are in regional banks–ties the fund’s performance to that of the industry and narrows the range of scenarios in which it can excel. It also creates some liquidity risk, which is managed through conservative position-sizing.
The strategy’s significant overweight in small-cap regional banks held back returns in recent years as they struggled against larger competitors. From October 1998 through March 2020, the strategy’s 7.2% annualized return beat the financial category’s 4.2% but slightly lagged the S&P 600 Financials Index’s 7.5%–which comes closest to matching the strategy’s bank exposure. Risk-adjusted returns beat the category and lagged the index by a few basis points.
The Bronze-rated institutional shares are a solid choice for a pretty pure play on small banks.
2326 2326 Eric Schultz Eric Schultz A new owner has let Emerald operate fairly independently. The firm keeps its Average Parent rating.
In October 2018, 1251 Capital Group–a small financial-services holding company founded in 2014–took a 51% stake in Emerald while leaving the rest of the firm in employees’ hands through its ESOP. The deal gave Emerald more distribution resources and locked up its portfolio managers for five years but otherwise left investment operations untouched. 1251 co-founder Michael Wilson previously invested in asset managers at Affiliated Managers Group and TA Associates and seeks to build a similar portfolio at 1251. Emerald is so far its only acquisition. Help with distribution is still in the early stages.
Emerald has tried to diversify its product lineup without success. In recent years, the firm acquired direct-lending and exchange-traded fund businesses, but both failed to scale and were quickly shuttered. Another acquired strategy’s paltry–and declining–assets raise doubts about its viability. However, Emerald’s legacy strategies, which focus on small- and micro-cap growth equities in separate accounts and mutual funds, are stable. Flagship Emerald Growth as well as Emerald Banking & Finance still hold nearly all the firm’s assets.
With supportive long-term owners, Emerald has a chance to refocus and build the business on its strengths.
Room for improvement under new ownership. 2020-04-20T11:20:00 2020-04-20T16:20:00Z Tied to regional bank performance. From the strategy’s October 1998 reconstitution as a financials-sector product through March 2020, its 7.2% annualized return beat the financial category’s 4.2% but slightly lagged the S&P 600 Financials Index’s 7.5%; this index best matches the strategy’s small-cap bank exposure. Similarly, risk-adjusted returns beat the category and lagged the index by a few basis points. Regional banks usually account for 70% to 80% of assets here and despite the narrow industry focus, the strategy hasn’t been more volatile or prone to collapse in down markets. During the same period, its volatility–as measured by standard deviation–was lower than both the category and the index. It has also held up better in most, but not all, drawdowns.
The long-term record suffers somewhat from current headwinds. In recent years, regional banks underperformed their larger-cap competitors that benefited from scale, diversification, and technological advantages. This dynamic was evident in the fund’s bottom-decile performance in 2018 and 2019, when regional banks struggled as the Federal Reserve paused its rate hikes and questions swirled about the strength of the U.S. economy. Regional banks were it hard again in the 2020 correction. The index fell 45.2% from its Jan. 2 peak to its March 23 trough, while the strategy declined 46.6% because of its characteristic overweight in regional banks.
It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s costliest quintile. Such high fees stack the odds heavily against investors. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral. FOUSA00GP1 A fine option in its niche, at the right price. Continued confidence in Emerald Banking and Finance’s experienced managers warrant upgrading the Morningstar Analyst Rating for its cheapest share class to Bronze, while the rest remain Neutral.
The strategy benefits from managers with deep knowledge of small-cap financials, especially regional banks. Kenneth Mertz has managed the strategy since October 1998, when the current approach was implemented, and has worked with comanager Steven Russell since he rejoined Emerald in 2006. Both are manager-analysts and complement each other. Mertz specializes in insurance, REITs, and macroeconomic data, while Russell focuses on banks. They draw on other analysts at the firm when needed and are adequately resourced compared with other financials sector Morningstar Medalists.
Their approach is notable for its consistent focus on small- and micro-cap banks, a niche where independent analysis can make a difference. Extensive travel and management meetings provide good visibility into businesses generally below the radar of larger funds and not covered by sell-side analysts. The managers extend this advantage with a long-term investment horizon. Turnover here averaged 39% over the past decade, versus 106% for the financials Morningstar Category. However, significant concentration–about 70% to 80% of assets are in regional banks–ties the fund’s performance to that of the industry and narrows the range of scenarios in which it can excel. It also creates some liquidity risk, which is managed through conservative position-sizing.
The strategy’s significant overweight in small-cap regional banks held back returns in recent years as they struggled against larger competitors. From October 1998 through March 2020, the strategy’s 7.2% annualized return beat the financial category’s 4.2% but slightly lagged the S&P 600 Financials Index’s 7.5%–which comes closest to matching the strategy’s bank exposure. Risk-adjusted returns beat the category and lagged the index by a few basis points.
The Bronze-rated institutional shares are a solid choice for a pretty pure play on small banks.
2326 2326 Eric Schultz Eric Schultz A new owner has let Emerald operate fairly independently. The firm keeps its Average Parent rating.
In October 2018, 1251 Capital Group–a small financial-services holding company founded in 2014–took a 51% stake in Emerald while leaving the rest of the firm in employees’ hands through its ESOP. The deal gave Emerald more distribution resources and locked up its portfolio managers for five years but otherwise left investment operations untouched. 1251 co-founder Michael Wilson previously invested in asset managers at Affiliated Managers Group and TA Associates and seeks to build a similar portfolio at 1251. Emerald is so far its only acquisition. Help with distribution is still in the early stages.
Emerald has tried to diversify its product lineup without success. In recent years, the firm acquired direct-lending and exchange-traded fund businesses, but both failed to scale and were quickly shuttered. Another acquired strategy’s paltry–and declining–assets raise doubts about its viability. However, Emerald’s legacy strategies, which focus on small- and micro-cap growth equities in separate accounts and mutual funds, are stable. Flagship Emerald Growth as well as Emerald Banking & Finance still hold nearly all the firm’s assets.
With supportive long-term owners, Emerald has a chance to refocus and build the business on its strengths.
Room for improvement under new ownership. 2020-04-20T11:20:00 2020-04-20T16:20:00Z Tied to regional bank performance. From the strategy’s October 1998 reconstitution as a financials-sector product through March 2020, its 7.2% annualized return beat the financial category’s 4.2% but slightly lagged the S&P 600 Financials Index’s 7.5%; this index best matches the strategy’s small-cap bank exposure. Similarly, risk-adjusted returns beat the category and lagged the index by a few basis points. Regional banks usually account for 70% to 80% of assets here and despite the narrow industry focus, the strategy hasn’t been more volatile or prone to collapse in down markets. During the same period, its volatility–as measured by standard deviation–was lower than both the category and the index. It has also held up better in most, but not all, drawdowns.
The long-term record suffers somewhat from current headwinds. In recent years, regional banks underperformed their larger-cap competitors that benefited from scale, diversification, and technological advantages. This dynamic was evident in the fund’s bottom-decile performance in 2018 and 2019, when regional banks struggled as the Federal Reserve paused its rate hikes and questions swirled about the strength of the U.S. economy. Regional banks were it hard again in the 2020 correction. The index fell 45.2% from its Jan. 2 peak to its March 23 trough, while the strategy declined 46.6% because of its characteristic overweight in regional banks.
It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s second-costliest quintile. That’s poor, and based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral. FOUSA00G3U A fine option in its niche, at the right price. Continued confidence in Emerald Banking and Finance’s experienced managers warrant upgrading the Morningstar Analyst Rating for its cheapest share class to Bronze, while the rest remain Neutral.
The strategy benefits from managers with deep knowledge of small-cap financials, especially regional banks. Kenneth Mertz has managed the strategy since October 1998, when the current approach was implemented, and has worked with comanager Steven Russell since he rejoined Emerald in 2006. Both are manager-analysts and complement each other. Mertz specializes in insurance, REITs, and macroeconomic data, while Russell focuses on banks. They draw on other analysts at the firm when needed and are adequately resourced compared with other financials sector Morningstar Medalists.
Their approach is notable for its consistent focus on small- and micro-cap banks, a niche where independent analysis can make a difference. Extensive travel and management meetings provide good visibility into businesses generally below the radar of larger funds and not covered by sell-side analysts. The managers extend this advantage with a long-term investment horizon. Turnover here averaged 39% over the past decade, versus 106% for the financials Morningstar Category. However, significant concentration–about 70% to 80% of assets are in regional banks–ties the fund’s performance to that of the industry and narrows the range of scenarios in which it can excel. It also creates some liquidity risk, which is managed through conservative position-sizing.
The strategy’s significant overweight in small-cap regional banks held back returns in recent years as they struggled against larger competitors. From October 1998 through March 2020, the strategy’s 7.2% annualized return beat the financial category’s 4.2% but slightly lagged the S&P 600 Financials Index’s 7.5%–which comes closest to matching the strategy’s bank exposure. Risk-adjusted returns beat the category and lagged the index by a few basis points.
The Bronze-rated institutional shares are a solid choice for a pretty pure play on small banks.
2326 2326 Eric Schultz Eric Schultz A new owner has let Emerald operate fairly independently. The firm keeps its Average Parent rating.
In October 2018, 1251 Capital Group–a small financial-services holding company founded in 2014–took a 51% stake in Emerald while leaving the rest of the firm in employees’ hands through its ESOP. The deal gave Emerald more distribution resources and locked up its portfolio managers for five years but otherwise left investment operations untouched. 1251 co-founder Michael Wilson previously invested in asset managers at Affiliated Managers Group and TA Associates and seeks to build a similar portfolio at 1251. Emerald is so far its only acquisition. Help with distribution is still in the early stages.
Emerald has tried to diversify its product lineup without success. In recent years, the firm acquired direct-lending and exchange-traded fund businesses, but both failed to scale and were quickly shuttered. Another acquired strategy’s paltry–and declining–assets raise doubts about its viability. However, Emerald’s legacy strategies, which focus on small- and micro-cap growth equities in separate accounts and mutual funds, are stable. Flagship Emerald Growth as well as Emerald Banking & Finance still hold nearly all the firm’s assets.
With supportive long-term owners, Emerald has a chance to refocus and build the business on its strengths.
Room for improvement under new ownership. 2020-04-20T11:20:00 2020-04-20T16:20:00Z Tied to regional bank performance. From the strategy’s October 1998 reconstitution as a financials-sector product through March 2020, its 7.2% annualized return beat the financial category’s 4.2% but slightly lagged the S&P 600 Financials Index’s 7.5%; this index best matches the strategy’s small-cap bank exposure. Similarly, risk-adjusted returns beat the category and lagged the index by a few basis points. Regional banks usually account for 70% to 80% of assets here and despite the narrow industry focus, the strategy hasn’t been more volatile or prone to collapse in down markets. During the same period, its volatility–as measured by standard deviation–was lower than both the category and the index. It has also held up better in most, but not all, drawdowns.
The long-term record suffers somewhat from current headwinds. In recent years, regional banks underperformed their larger-cap competitors that benefited from scale, diversification, and technological advantages. This dynamic was evident in the fund’s bottom-decile performance in 2018 and 2019, when regional banks struggled as the Federal Reserve paused its rate hikes and questions swirled about the strength of the U.S. economy. Regional banks were it hard again in the 2020 correction. The index fell 45.2% from its Jan. 2 peak to its March 23 trough, while the strategy declined 46.6% because of its characteristic overweight in regional banks.
It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s second-costliest quintile. That’s poor, and based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral. FOUSA06TVD Pending