Research team looks ahead as Riverwater Partners’ SMID Value Strategy reaches five-year milestone
Chief Investment Officer Adam Peck says industry’s lack of ESG focus in small-cap value is inconsistent with value-investing mindset
Milwaukee, October 13, 2021 – Riverwater Partners’ flagship ESG Small & Mid Cap (SMID) Value Strategy marked its five-year anniversary at the end of September. In the following Q&A, Riverwater chief investment officer Adam Peck discusses what’s changed in the industry and at Riverwater since the Strategy’s launch in October 2016.
Together with three colleagues on the firm’s Research Team, Peck maintains a portfolio of 20-35 small and mid-sized companies generally between $250 million and $20 billion in market capitalization. The team also manages an ESG large-value strategy also launched in 2016 and an ESG micro-cap strategy launched in 2018.
Q: ESG assets have more than tripled in the last ten years. How has that affected the ESG small-cap value space?
Peck: The overall growth of ESG-focused assets has been phenomenal, but the small-cap value space is among the corners of the market yet to embrace investor interest. We believe we are one of the only ESG-dedicated investment teams working in small-cap value—both among specialists and within large firms.
That’s something of a surprise because the value mindset has much in common with the ESG mindset. Both require investors to focus on how businesses can improve—and what improvements may be financially material. Both also include actively supporting positive change. And both require an awareness of the larger context in which a company does its business.
Q: Do you still run into a perception that ESG investing is a fad?
Peck: Yes. That’s a misperception that is particularly addressable, in my view, by those of us in the value space. At an intuitive level, value investing is about seeking out companies that are or may be getting better. And some of the avenues that firms are striving to improve—including in response to stock prices in value territory—are along ESG dimensions.
So, what the “fad” viewpoint misses is companies’ own efforts, which are often independent of investors’ interest. ESG isn’t a fad because companies aren’t going to stop trying to save energy. They aren’t going to stop innovating ways to operate more efficiently or trying to appeal to younger consumers who want to buy from companies that share their values.
Q: How does that commitment to ESG show up in your meetings with management teams?
Peck: Compared to five years ago, small companies are drastically more interested in ESG topics. Recently I was on a conference call with management of a trucking company. The CEO proactively raised ESG themes in his remarks, including the upcoming release of the firm’s first-ever sustainability report. This is a very small company. CEOs across the entire capitalization spectrum are realizing they need to embrace ESG factors not only to engage with their investors but to build and maintain healthy businesses.
Q: Has anything changed in five years about how you evaluate ESG factors?
Peck: Our three investment pillars—exceptional management teams; superior business; and attractive valuation—remain our foundation. Three years ago, we rolled out a proprietary ESG scoring system built on those pillars. We maintain our own database based on the Global Reporting Initiative standards.
Q: What’s changed at Riverwater in five years?
Peck: We were certified as woman-owned. We became a Certified B-Corp and received two worldwide awards from the B-Corp organization. We joined UN PRI as a signatory and earned an A-plus rating for engagement. Locally, we sponsored a scholarship program at the University of Wisconsin-Milwaukee and have welcomed several interns from the school.
More than anything, I’m proud of our people. We’ve expanded our Research Team, and now three of the four members hold the CFA credential. We also expanded our team with the acquisition of a wealth management group.
About Riverwater Partners, LLC
Riverwater is Wisconsin’s largest fully dedicated manager of socially responsible investments. The firm applies environmental, social and governance (ESG) criteria as it builds value-oriented portfolios of small, mid and large-sized companies. Based in Milwaukee, Riverwater is woman-owned and a Certified B Corporation™. Learn more at riverwaterpartners.com/.
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