Granahan Investment Management (“GIM”) employs fundamental, bottom-up research to invest in stocks of companies that, in the manager’s opinion, exhibit a critical combination of superior growth prospects and attractive risk reward profile. GIM believes that over a 3- to 5-year period, company earnings and business value drive stock prices; but over shorter time periods, stock valuation and market sentiment variations can have an equally vital impact. It is important to consider both the growth prospects and market sentiment.

GIM believes that the small cap market is an inefficient sector of the overall market and provides the opportunity for skilled investors to realize superior returns. The small cap market has a skewed distribution of returns where a small but meaningful number of high-performing stocks drive the return of the benchmark. Within the set of these high-performing stocks is a wide spectrum of names ranging from straight up growth companies to companies that have sorely disappointed investors in the past.

Significant opportunities in the small cap market are created by the predilection of most investors to seek the next emerging growth winners; far fewer want to risk buying companies that have disappointed investors in the past, so they avoid this pool of attractive stock candidates generated by negative sentiment and/or impatient investors. By applying a passion and knowledge of sectors with an open mind and independent thinking, Granahan Investment Management seeks out the best combination of emerging growth prospects and stocks struggling under negative sentiment with a goal of achieving excess returns and limiting losses.

Each company under consideration for the portfolio is assigned a LifeCycle category:  Pioneer, Core Growth or Special Situation.  Granahan’s LifeCycle categories formally delineate the portfolio between the dynamic emerging growth stocks and those that provide stability in the portfolio as undervalued stocks with bright earnings growth prospects.  LifeCycle diversification, along with industry diversification, mitigates risk in the overall portfolio.

Portfolio Construction

For the Small Cap Core Growth and Small Cap Explorer products, GIM utilizes a team approach to portfolio management where the portfolio managers each manage a sleeve of the portfolio.  This enables each portfolio manager to best leverage his/her research expertise, to have direct responsibility for the stock selection in his/her portion of the portfolio, and to run a portfolio (within a portfolio) without being restricted by the bureaucracy of an investment committee.  The result is a client portfolio that is not drawn to mediocrity by the consensus-decision-making process of a committee structure.  This structure also ensures consistency across portfolios in the firm. 

At the portfolio level, GIM diversifies by LifeCycle and industry.  The LifeCycle categories – Pioneers, Core Growth and Special Situations – each have different drivers for performance, thus tend to be uncorrelated to one another, providing a true diversification measure for the portfolio.  Further portfolio controls include a 5% maximum for each holding, and a limit for each industry of 20% or twice the benchmark weighting, whichever is greater.

Stock Selection

Visits with company managements are integral to the investment process as they allow GIM to validate the business prospects and competitive position of existing holdings, as well as to identify new prospects in which to invest. GIM believes that a sector expert is in the best position to dissect the information gathered from management meetings, so each GIM professional has at least one core area of expertise. The portfolio managers and analysts utilize traditional measurements such as sustainable earnings growth, balance sheet quality, profitability trends, competitive positioning, and management strength to determine high quality companies.

The investment case for a validated, high quality portfolio candidate will include defining the company's business growth prospects and measuring the fundamentals against the market valuation for the stock.  It is important to understand the market expectations for the stock and to articulate why we believe the expectations are too low.  Company-specific milestones are used to track that the investment case is unfolding as envisioned.  Conviction level on each investment, along with liquidity and other market factors, determines position size.

Sell decisions are typically prompted by a company diverging from GIM's investment case milestones.  Milestones center on expected actions of a company, margin trends, sales trends and balance sheet trends.  A shift in LifeCycle category may also prompt a sale.

The experience of the investment team combined with a disciplined investment process honed over more than 25 years results in a client portfolio that can consistently perform over the long-term.