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Diversified Small Cap Value Equity

Our Diversified Small Cap Value strategy is designed to exploit inefficiencies in the small cap sector through a proprietary, quantitative "factor" model that comprehensively analyzes and ranks the universe of companies comprising the Russell 2000® Index. The model incorporates more than 60 fundamental, valuation, and price-based factors that are utilized to identify companies for which the intrinsic value of the underlying business is significantly greater than the market price of the stock, which we refer to as a "value gap". Key indicators of a value gap are below-average price-to-revenue ratios, price-to-earnings ratios, and price-to-book ratios, and above-average free cash flow yields. BHMS' Diversified Small Cap Value strategy is managed in partnership with Analytic Investors.

Strategy Summary
Asset Class U.S. Equity
Investment Style Value
Portfolio Benchmark: Russell 2000® Value Index
Portfolio Assets $570 MM as of 12/31/2016
Separate Account Open

Investment Process

Our initial universe consists of the roughly 2000 stocks that comprise the Russell 2000� Index, with market caps generally ranging between $300 million and $3.5 billion. We utilize a proprietary database and quantitative methodology to systematically screen stocks based on more than 60 fundamental, valuation, and price-based "factors" that can broadly be organized into categories including, (1) relative valuation, (2) economic sensitivity, (3) growth potential, (4) risk, (5) historical returns (price momentum), and (6) liquidity. A sampling of factors consistently significant to the screening process includes below-average price-to-revenue ratios, price-to-earnings ratios, and price-to-book ratios, and above-average free cash flow yields and return on capital (ROE, ROA).

The screening process ranks the stocks in the Russell 2000� Index from "best to worst," and the final 150 to 200 stocks that are purchased in our portfolio are selected from the "best" ranking stocks in the top decile (highest ranking 200 stocks in the Index), provided they meet our risk-control criteria. By employing a disciplined value-oriented strategy, through a systematic and risk-controlled quantitative methodology, the overall goal of the strategy is to consistently generate superior excess returns while assuming below-average levels of risk.

A stock must rank in the top decile in order to be eligible for purchase. A "buy" is typically triggered on the model by a stock that has declined in price relative to its fundamentals, causing it to be identified as undervalued and attractively ranked by the model (provided it meets our risk-control criteria). A stock is held as long as it continues to rank within the top three deciles.

A sell is triggered when a stock ranks below the third decile. The model typically prompts a sell when a stock rises dramatically in price relative to its fundamentals, causing the stock to rank less attractively on the model because it has reached fair or full valuation. A "sell" could also be activated by deterioration in a company�s fundamentals that causes the stock to rank less attractively.

Portfolio Characteristics as of 12/31/2016

  Portfolio Benchmark1
P/E Ratio (Trailing 12 Months) 21.1 19.7
P/B Ratio 1.8 1.5
Weighted Average Market Cap ($B) 1.6 2.0
Median Market Cap ($B) 1.1 0.7
Dividend Yield 1.3 1.9
1Russell 2000® Value Index
Sector Weightings as of 12/31/2016
Consumer Discretionary 28.6%
Industrials 26.7%
Information Technology 22.0%
Materials 8.5%
Financials 7.4%
Health Care 3.5%
Consumer Staples 2.1%
Energy 1.0%
Real Estate 0.1%
Performance as of 12/31/2016
Annualized Portfolio Returns (%)

*3 Month returns are not annualized.


Barrow Hanley's returns are shown before investment management fees and custody expenses. Index returns do not reflect transaction costs, management fees, and other expenses. Performance is expressed in U.S. currency. Statistics are presented as supplemental information to the BHMS Diversified Small Cap Value composite. A full disclosure presentation may be accessed from the link above. Barrow, Hanley, Mewhinney & Strauss, LLC claims compliance with the Global Investment Performance Standards (GIPS®).

All institutional product information has been provided by Barrow, Hanley, Mewhinney & Strauss, LLC. Any questions about this material or requests for additional information may be made directly to the firm from the "Contact Us" link above.

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