Building Durable Growth Through Discipline and Research

As investors look for sources of growth beyond the largest companies, small and mid-cap growth stocks present an attractive opportunity set. In this Q&A, GW&K’s Equity Portfolio Manager Joe Craigen shares how our experienced Small and Small/Mid Cap Growth Team approaches this part of the market with a disciplined portfolio construction process. He also discusses how the team evaluates opportunities across sectors and industries, with an emphasis on diversification, risk management, and long-term outcomes.

Q: How would you describe GW&K’s approach to small and small/midcap growth investing?

Joe Craigen: We are bottom-up, fundamental investors with a long-term approach. Our philosophy, in simple terms, is to invest in really good businesses led by really good management teams when they can be purchased at reasonable valuations. In particular, I want to emphasize the importance of the management team to our approach — and we are quite focused on the CEO. We certainly pay attention to the people who report to the CEO, but it is the CEO who is ultimately responsible for the strategy, culture, hiring, operations, and capital allocation of a company. We also consider the people above the CEO, the board of directors. Unfortunately, investors rarely have the opportunity to interact with directors, but the board is a consideration in our analysis. We really like to see directors with CEO experience, either current or in the past — primarily for two reasons: first because those people are probably best positioned to give advice and counsel to an existing CEO about the challenges that person is facing. And second, those board members are most likely to be in a position in their careers where they can push back on a CEO when necessary.

Q: What do you think makes the team’s investment culture and research process effective?

Joe: There are a number of factors that we believe contribute to the effectiveness of our team. At or near the top of the list is the experience of the group. As mid-career professionals, we typically have decades of experience investing in the sectors that we cover. Beyond investment experience, we have decades of life experience. The ability to sit across from a senior executive and make both professional and personal judgements about that individual are critical inputs to our investment process. We are evaluating whether an individual has the requisite experience and intelligence, as well as the integrity and passion to run one of our portfolio companies.

Beyond the experience of our team, I would highlight a culture of respect and collegiality that encourages open, thoughtful conversations about the investments under consideration. Finally, the stability of the team is a differentiator. I’ve been at GW&K for over 15 years and in that time we’ve had only two stock pickers leave. I think people recognize that we have something pretty unique.

Q: How do you evaluate companies at the sector and industry level while still staying grounded in bottom-up research?

Joe: Paying close attention to the benchmark’s sector and industry weights is an important part of our risk control process. We look for companies that understand their competitive strengths and remain focused on them. Applying that discipline to ourselves means focusing on bottom-up stock selection, rather than a top-down approach. With over 1,000 stocks in our benchmark, we have plenty of companies to choose from in order to drive alpha. Importantly, we do not just apply that framework at the sector and industry level, but also to certain business exposures that may cut across sectors and industries. Classic examples of this would be housing and autos, which appear in multiple sectors. More recently, AI is an area that has become a large part of the benchmark and can be found in numerous sectors. We are quite cognizant of our AI exposure at the portfolio level, making sure that here again we let our bottom-up stock selection do the talking.

Q: What characteristics do you look for in companies before they earn a place in the portfolio?

Joe: We’ve covered the importance of the management team to our analysis of investment opportunities. As for the companies themselves, we look for businesses that have differentiated products and/or services, along with a track record of investment and innovation to maintain that differentiation. We want companies to then take that product or service advantage and translate it into a dominant or improving position in a market that is large and/or rapidly growing. And of course, we want to see the fruits of those efforts materialize in attractive growth, margins, cash flow, and return on capital.

Q: How do you approach evaluating biopharma companies, and what factors matter most when assessing the durability of their growth?

Joe: Biopharma often gets treated by investment managers very differently than other industries. In some cases, that can mean avoiding the industry entirely, or going to the other extreme by taking a basket approach. As for how we invest in biopharma, there is a lot more in our approach that is similar to how we approach other industries than different. Not surprisingly, that means going back to the focus on management. Management is arguably all the more important in biopharma because in the case of clinical stage biopharmas, companies need to navigate both the development of a therapy as well as the commercialization of that therapy in order to be successful over the long term.

Those can be very different challenges. We invest in both clinical stage and commercial stage companies. When investing in the former, we focus on companies with later-stage assets — preferably multiple assets — where our research tells us that there is a high likelihood of regulatory approval, and ultimately success in the market.

Q: How do you think about investing across different levels of growth, and how do you balance companies with durable, steady growth versus those with more aggressive, higher-risk growth profiles?

Joe: This is another example of our emphasis on bottom-up stock selection. Just as we want to create a well-diversified portfolio across sectors, industries, and business exposures, we strive to do the same with the level of growth. That means investing in companies with growth profiles ranging from the more modest to the more rapid. Another important item to mention is that people often just focus on the pace of growth when discussing a company’s growth profile. While we recognize the importance of that, we also put a lot of emphasis on the consistency of that growth and the durability of that growth. For any given sector, we tend to gravitate to the companies that have the ability to generate consistent earnings growth over a long time horizon.

Q: How do you think about diversification and risk management when building and maintaining the portfolios you manage?

Joe: Controlling risk is a very important part of our investment process. We’ve outlined some of that already, such as not making large sector, industry, or market bets, and instead letting our bottom-up stock selection drive returns. In addition, we use portfolio analysis tools to help ensure that we do not have any unintended exposures in the portfolio. We also control risk through thoughtful position sizing, ensuring that no single holding has an outsized impact on portfolio outcomes. The number of investments range from 65 – 95 holdings, which strikes an appropriate balance between diversification and concentration. Lastly, our due diligence process plays an important role in managing risk. By identifying strong businesses led by experienced management teams and investing in them at reasonable valuations, we aim not only to drive long-term returns, but also to help mitigate downside risk.

Q: What do you want investors to understand most about your strategy over a full market cycle?

Joe: Our strategy is grounded in the strength and consistency of our team, as well as our disciplined approach to risk and opportunity assessment. We have a deeply collaborative culture, a repeatable research process, and a long-term mindset that help us stay focused through changing market environments. We seek to balance the pursuit of attractive growth opportunities with a disciplined approach to risk management and capital preservation. We believe that this balance of upside participation and downside protection is a key differentiator of the strategy and is a reflection of the experience of our team, the consistency of our process, and our focus on long-term outcomes.