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Quarter	Letter Date	Fund Name	QTD	YTD	Tickers	Themes	Quick Take

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Conestoga SMid Cap Composite 2023 Q3 Investor Letter | Buyside Digest

Back to Fund Profile (Conestoga SMid Cap Composite)

Primary Source Intelligence • Q3 2023 Letter Analysis

Conestoga SMid Cap Composite Quarterly Analysis

Buyside Digest is not affiliated with, and does not endorse, Conestoga SMid Cap Composite. This analysis is provided for institutional research purposes only and is not investment advice.

Fund Returns

Annualized+9.03%

Digest Analysis

Quick Take

"Conestoga's SMid Cap strategy slightly outperformed in Q3 despite market headwinds, driven by quality positioning in profitable, lower-debt companies. Infrastructure spending and software transitions provided key performance drivers while Chinese exposure created headwinds."

Executive Summary

Conestoga's SMid Cap Growth Composite declined 6.36% net in Q3 2023, slightly outperforming the Russell 2500 Growth Index. The firm maintains its focus on higher-quality companies with positive earnings, higher margins, and lower debt levels, believing this positioning will benefit performance in an environment of higher interest rates and potential recession. Key contributors included Construction Partners, which benefited from robust infrastructure spending and record backlogs driven by the 2021 Federal infrastructure bill, and Fair Isaac Corp, which reported strong results across both its Scores and Software businesses. Technology holdings faced headwinds, particularly Novanta due to Chinese business weakness and SPS Commerce from natural consolidation. The firm continues to expect a new small cap cycle after twelve years of underperformance, noting that small cap valuations relative to large caps have become more appealing. Portfolio positioning emphasizes quality characteristics that should provide defensive benefits while maintaining exposure to secular growth themes.

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Institutional Meta Strategy

Meta Strategy Gauges

Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.

Signal Matrix

Market Conviction

68%

CautiousHigh

Moderate (68%)

The manager demonstrates solid conviction through specific position sizing discussions, detailed company analysis, and clear quality criteria. However, the diversified 40-60 position portfolio structure and measured language around macro themes prevents a higher score.

Growth Outlook

38%

BearishBullish

Neutral (38%)

The manager expresses cautious optimism tempered by near-term concerns. While they maintain conviction in a coming small cap cycle and note attractive relative valuations, they acknowledge recession risks for 2024 and higher-for-longer interest rate concerns.

Risk Appetite

15%

DefensiveAggressive

Defensive (15%)

The portfolio maintains a constructive but selective stance, adding new positions like CSWI while selling underperformers like OMCL. The emphasis on quality characteristics suggests a measured risk approach rather than aggressive deployment.

Capital Deployment

5%

De-riskingDeploying

De-risking (5%)

Limited net deployment activity with one new position added (CSWI) and one sold (OMCL), representing rotation rather than significant new capital deployment. No cash level changes mentioned to indicate meaningful deployment direction.

Forward Guidance

10%

CautiousExpansionary

Cautious (10%)

The manager is selectively adding positions and maintaining conviction in their quality approach, but the guidance is measured rather than aggressive. They are positioning for opportunities while acknowledging economic headwinds.

Language Signal

0%

BearishBullish

Bearish (0%)

The language is balanced between opportunity identification (infrastructure spending, small cap cycle) and risk acknowledgment (recession expectations, rate concerns). Positive themes around quality positioning are offset by cautious macro commentary.

Perceived Risk

55%

Low RiskElevated

Moderate Risk (55%)

The manager identifies specific macro risks including higher-for-longer rates, recession expectations for 2024, and ongoing Fed tightening. Company-specific risks around Chinese exposure and business model transitions are also discussed meaningfully.

Opportunity Density

60%

ScarceAbundant

Selective (60%)

The manager sees selective opportunities, particularly in quality companies and infrastructure-related themes, but emphasizes the need for selectivity in the current environment. The addition of CSWI suggests they are finding attractive ideas but not broadly.

Time Horizon

70%

Short-TermLong-Term

Decade+ (70%)

The manager discusses multi-year themes including the small cap cycle expectation and infrastructure spending benefits over time. Their quality approach and willingness to hold through volatility suggests a medium to longer-term orientation, though specific catalyst timelines are mentioned.