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Valuation and Free Cash Flow Focus Propel This Fund

Valuation and Free Cash Flow Focus Propel This Fund

Andrew Daniels: Bronze-rated Cardinal Small Cap Value benefits from a conservative discounted cash flow approach and a long-tenured management team.

The managers look for small-cap firms with strong returns on invested capital and high free cash flows relative to enterprise value. They build a five-year DCF model for each prospective investment, using a conservative 20% discount rate. Such high-return businesses usually only meet the managers' strict valuation requirements if the market is missing something.

The resulting portfolio is concentrated, holding approximately 40 to 60 stocks that are weighted by conviction. While the mutual fund only incepted in April 2014, Cardinal has successfully run this strategy as a separate account since 1992. Since then, the separate account has posted exceptional returns with much lower volatility.

All told, management's disciplined focus on valuations and strong free cash flows inspire confidence that it will outperform over a full market cycle.

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About the Author

Andrew Daniels

Associate Director
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Andrew Daniels, CFA, CAIA, is associate director of equity strategies for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He helps oversee Morningstar’s U.S.-based equity strategies team and is responsible for qualitative research on prominent equity strategies, including those offered by Harris Associates and Artisan Partners.

From 2018-21, Daniels was based in Morningstar’s Hong Kong office, conducting qualitative research on global emerging-markets and Asia-Pacific equity strategies, in addition to helping on the delivery of manager research services in the region.

Before joining Morningstar in 2015, Daniels worked in corporate finance for Caterpillar and in portfolio management for Evanston Advisors.

Daniels holds bachelor's degrees in finance, economics, and marketing from the University of Iowa, where he graduated with distinction. He also earned a Master of Business Administration from the University of Chicago Booth School of Business. Daniels holds the Chartered Financial Analyst® designation and the Chartered Alternative Investment Analyst® designation. He is also a Certified Management Accountant.

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