Some will tell you making good investments isn’t rocket science, but Steve Smith isn’t one of them. Smith began his career as an engineer at Nasa, and is alive to the parallels between his former job and his current role, as founder and chief executive of Dallas-based Smith Group Asset Management.
Smith (pictured) followed in the footsteps of his father Orville, one of one of the first American engineers hired by German rocket scientist Wernher von Braunn, when he took up a job at Nasa in July 1969, the same month Neil Armstrong became the first man to walk on the moon. He is keen to instill the same problem-solving ethos that helped power rockets within his asset management firm.
‘If you think about a rocket and what causes it to move in a certain direction, what causes our performance to move is that we are very good at finding companies that, 12 months from now, will have grown their earnings faster than what is expected today,’ he said.
Teamwork is also vital. ‘When you put a team together you have to be on the same mission.
With Nasa that was to put people on the moon and with Smith Group it’s to be an industry leader in measuring returns per unit of risk,’ he said.
Founded in 1995, Smith Group Asset Management has been on an upward trajectory of its own, having grown assets to $3.5 billion through its focus on the separately managed account space.
Kenneth Wallace, director of business development, said the firm was looking for companies with the right earnings growth.
‘A company can say, “Hey look at our earnings growth—it’s great!” but then you really have to look at the quality of those earnings,’ he said.
‘Are they generating cash to get earnings or is it just messing around with the financial statement?’ Wallace said.
The firm uses a systematic quant-based process to identify a shortlist of stocks, before analysing their fundamentals in deciding whether to buy.
It runs a secondary screen that ranks stocks based on their earnings growth rate. A lot of human groundwork then goes into backing up the numbers.
‘Every night, the computer forms the buy-list,' Smith said. 'After looking at the names, the managers will go through deep fundamental research to figure out where those companies belong in our portfolio.'
The managers will also evaluate how other security analysts come to their conclusions.
‘If there is an analyst who has been far back with an earnings number and suddenly goes out on a limb, we’ll talk to them and find out what it is that they now know,’ Smith said. ‘Analysing the analyst is as big of a part of our process.’
SMALL BUT PERFECTLY FORMED
There are eight employees on the investment team.
‘With the quantitative front end we have, one of the advantages of our investment process is that we can do a lot of work with fewer people,’ Wallace said.
Smith accredited some of the firm’s success to sticking to what it knew. The firm specializes in growth strategies and runs a variety of them including large cap, small cap and global.
‘We’re competing with the big guys but if you’re going to be a successful boutique, you’ve got to stick to one thing and not be tempted to roam around what other people are doing,’ Smith said.
‘Make sure that one thing gives you a competitive advantage – in our case it’s finding positive unexpected growth.’
They have returned 37% over the past three years, compared with the average manager's 29.3%
The firm has one mutual fund: the $46.7 million Smith Group Large Cap Core Growth fund, which was launched in 2007.
Its other strategies, including large- and small-cap growth strategies, are run for institutional mandates.
But after enjoying a rocket-fuelled growth ride, Smith is now comfortable with the calmer expansion for his business the last few years has brought.
‘For five years we grew at 40% per year, which felt good while it was happening, but we learned that we could not manage that growth,' Smith said.
‘We need not worry about becoming a big player because that’s not what we are and probably we never will be. Nor do we have any interest in being part of a big player – we like being our own boss.’