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Valuation and Free Cash Flow Focus Propel This Fund

Bronze-rated Cardinal Small Cap Value uses a conservative discounted cash flow approach in a concentrated portfolio.


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.

Andrew Daniels does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.