Interview with Singular Research’s Robert Maltbie: Stockpicking in the Age of ETFs

Robert Maltbie |


In recent years, there’s been a counterargument gaining momentum that questions the belief in the “small-cap premium.” For decades, investors have accepted the notion that small-cap companies possessed higher potential to create excess returns.

While, as a whole, tracking the two asset classes may produce inconclusive results, what it’s discounting is the ability of investors to conduct old-fashioned, roll-up-your-sleeves stock picking.

Simply put, small-cap companies don’t have access to the public exposure, deep analysis, and capital that large cap stocks do. Investors who can find quality names and get ahead of the curve can still find the proverbial multi-baggers. In fact, in many cases, the opportunities are more abundant today because of market conditions than in past periods. recently spoke with Robert Maltbie of Singular Research and Millennium Asset Management to get his take on how the market’s over-reliance on ETFs has impacted the small-cap space, diluting the profit potential for investors, and how it’s possible for investors to use this trend to their advantage.

EQ: For our newer readers, can you talk about the history of Singular Research and what motivated you to start the firm?

Maltbie: Around the time after Sarbanes-Oxley and when the Enron and WorldCom research settlements happened, we had an asset management firm that was managing a decent amount of money. This was when the market was starting to really cut back on research, and we perceived a need for clean research that was not driven by investment banking. That led us to launch Singular Research.

We thought that if we’re trying to manage money, maybe we’re not the only ones that noticed this problem. So we reached out a little bit, talked to some other funds and realized that there was a lot of interest in some type of coverage on small-cap stocks because that’s where most firms were cutting back their coverage. From there, we hired one analyst—selfishly for our own research needs—but from there we hired another. Very soon, we got the feedback and input telling us that there was going to be other settlements, other initiatives and other firms wanting these services. That’s how we grew Singular Research, it was driven by market demands.

EQ: How would you categorize your coverage universe? Do you focus on specific sectors or do you run the gamut in the small-cap space?

Maltbie: We’re a bottoms-up firm, rather than by sector or top-down. That means we look for special situations, opportunities, catalysts, and companies that are below-the-radar screen that coverage. We tend not to be in technology or biotech, or in areas where there’s already a lot ofinterest and banking. If there’s already three-to-five firms covering them, we find that it’s hard to add value there as far as jump ball for banking business, and it depends on your strength and the distribution, and not based on your intellect or your analytical prowess.

We look for things that are off the beaten path. They tend to be turnarounds in all kinds of industries, mainly skewing toward industrials, retail, light technology, consumer products, and in cyclical names too. Sometimes they are in tech, biotech, or finance.

EQ: That’s a strategy that’s really paid off. Can you talk about Singular Research’s track record throughout the years?

Maltbie: Yes, that’s really our brand. We’re performance-based research. There was a study done by the New York Stock Exchange back in the late 1990s and early 2000s that statistically proved companies that lacked coverage tended to be mispriced by an average of 20-30%, depending on the market environment. Again, this was inspired by the corruption of research and cutbacks during that time.

So we realized that if there is that type of discrepancy, that obviously could be arbitraged on one end, the investment and research for that would seem to have a payoff. So we tried to focus on where we could add the most value and where the statistical probability has the greatest impact, which is in the realm of companies that are uncovered by Wall Street research. They tend to be a certain market capitalization size, but every now and then, you’d be surprised. You might get the bigger ones that just shun the Street and decide to grow organically by self-financing. Companies like that often turn out to be some of the best ideas you can find.

EQ: How has your research performed against the market?

Maltbie: Since we incepted about 10 years ago, the Singular Coverage List has, in terms of alpha, provided an annual return about 450 basis points above the Russell 2000. That’s consistent on an annual basis. We’ve had some pretty tough markets during this time, like in 2008, but we found that we were able to add a lot of alpha by covering names that lack coverage. The percentages tend to be nearly twice the Russell’s average.

And though the S&P 500 is not our best market, because we cover small stocks, it’s even higher there. It’s about three-plus times the S&P’s return over that period. That’s where we think we can add a lot of value for investors: in excess return. Of course, this is over the long term becausewe really have to be patient with small caps. They can be pretty volatile.

EQ: Singular Research also hosts conferences like the Best of the Uncovereds Conference, where you bring some of these companies together to meet investors. Do you plan to expand the number of events each year?

Maltbie: We’re not really in the conference business but we try to showcase some of our best ideas, though. We try to reach out to our markets. We only cover about 50 names, and it’s focused on companies that we have research on already. Our idea is to bring the show to the folks, and bring our conference to where the markets are and where the institutional investors are. We used to just do a West Coast conference, but now we do one in Los Angeles and then one in New York City in late November. We’re considering doing one either in the mid-west, maybe Chicago, or San Francisco. So we might expand to a third one.

EQ: What type of investor is your research designed for?

Maltbie: Our clients are strictly institutional money managers. That’s because our subscription is not for the average investor or even a high net worth investor, because for them, it’s so expensive. But mutual funds and hedge funds can manage hundreds of millions of dollars. So it definitely saves them, because they don’t have to hire a staff of analysts. That’s really where the economies lie in our product.

We also just recently launched a couple of new products. One is a quantitative research product that looks for what is now called “smart data” – its factors drive excess return. So we’ll do screens on long/short pairs, do quantitative screens of extra-earnings momentum, or the reverse of that. We partnered with a top quantitative research firm called Sabrient Research, and that’s all they do. They’re founded by a NASA scientist and we figured, if they were smart enough to get somebody on the moon, certainly they can help pick some stocks.

The other product that we’re excited to roll out is our Macro Market Indicators. It’s something we were beta-testing a while back, and we think it’s viable. The idea is we come up with very broad base, diverse inputs from over 55 different economic indicators and series to give us, as scientifically as possible, a sense of whether we should be in or out of the market and by how much in the coming 12 months. It has been very helpful to us and our clients in that it helped us avoid 2008 largely going bearish, and also helped us brace for what we call the Alibaba Group Holding Ltd. (BABA) the correction. What the indicators picked up there was a large a sucking sound. It was the sound of Alibaba sucking up all the capital of the market for the largest offering ever. The managers would have to sell a lot of other stocks to buy this one, and Alibaba worked. But the market didn’t, and it soon corrected.

EQ: There’s also the Argonaut Fund, which is run by Millennial Asset Management. It is based off of Singular’s research. Can you tell us more about the progress of the fund?

Maltbie: Millennium is the registered investment advisor for our products leveraging the research.

We’re currently looking to leverage that to get on to more platforms. As an example, we would get onto a broker firm’s platform as a product, maybe as a mutual fund product. That way, they and individual investors can hopefully enjoy the alpha we’ve been creating from the Coverage List.

We have had some good progress over the last couple of years, although not as fast as we’d like. We recently were retained as a sub-advisor of what’s called a ’40 Act fund. It focuses on all strategies, which is what we do. We’re a small microcap fund manager, and they saw the numbers and the track record, and they had the idea that they would also like to start a multi-strategy fund with this being one of them.

We have experienced a pretty good degree of asset grow over the last couple of years. I believe it’s been excessive of 100%. We’re excited about continuing to lever that momentum into other institutional funds, having a specialty focus on our product as a single strategy with other funds and other platforms.

Also, for accredited investors, we have our hedge fund, which is sort of like the Cadillac. It actually has been producing a pretty strong track record.

EQ: So in terms of asset management, you have various approaches?

Maltbie: Right. We have three of them. We have our hedge fund, which we’re growing now, and that’s for accredited investors called the Argonaut 2000 LP Fund. We also have our Millennium individual managed accounts, and they’re all separately managed accounts focused on a lot of the research we do at Singular.

Then, we also sub-advise a specialty mutual fund that focuses on alternative strategies, trying to access the expertise of hedge fund managers that can provide liquidity to individual investors and their track record and expertise. Their strategy is very differentiated, and it entails hedge fund-like strategies like what we have. They have nearly $1 billion under management now, I believe.

EQ: What are some strategies that you’re looking at to grow this side of the business?

Maltbie: Yes. Well, there’s a couple ways to get to the Golden Fleece as it were. One is to grow organically by having internal market distribution, sales force, etc., and hope people discover you for your track record. Another complementary way is to grow by acquiring assets, which would be other similar-styled funds that focus in our realm and then to team up with them to get on the fast-track. We think there’s a great opportunity in the market, and our goal is to grow up to $1 billion in assets under management from where we are now. Let me just say, I think it’s very ambitious. In this day and age, $1 billion dollars is where you get on most radar screens of mutual funds.

But we’re very confident that we’re differentiated enough and we provide a lot of unique value in the micro and small-cap space. Being a research provider in Singular, we know this. The cost of research is very expensive and almost prohibitive for the assets under management in the microcap space. So usually, you have funds out there that are more like closet index funds. They have many, many stocks—maybe a hundred or two hundred. They’re overly spread out and diversified, diluting the impact of some really good stocks.

They’re basically just playing the asset class. We see that the real value in the asset in this market is discovery research – finding companies that are under the radar screen where something’s going on. Things like new management, new products, or turnaround stories. That’s hard to find. It takes research analysts.

In this day and age, with the budget cuts, the scaling up, and the popularity of ETFs, it’s left this whole area for us to develop a fund that is highly focused yet diversified. So there’s real value in Singular providing deep discovery quality research on the 40 to 50 names, rather than just a quantitative index.

EQ: The small-cap-space is very much a stockpickers market. As a whole, you’re not going to get the type of performance that people talk about when they talk about small-caps, which is the extraordinary returns, if you’re just playing the entire asset class.

Maltbie: We think, clearly the skew for our research is companies that lack coverage, the companies that are $500 million and down. Those are small caps, or even what are now called microcaps. That’s where we find the mispricing statistics that I referred to earlier, where companies are priced at a 20-25% percent discount to their cousins that have research coverage.

EQ: Do you have any advice for investors looking at these small-cap opportunities in today’s market?

Maltbie: We think definitively that it will pay off for individual investors to invest in the sector, but they have to do their own homework as well, of course. You have to be responsible and know what you own. It’ll help you own it long-term. That’s where we think you make the excess return. The big trend right now is that the ETF is everything. We think that’s really more of a drone investing, passive ETF approach. It’s very exotic.

As far as what we’ve seen in the last year, there’s tremendous imbalance of capital being allocated into ETFs. What that means is, let’s say you own the S&P 500. Well, you own a little bit of 500 stocks and that’s going to include probably about 300 to 400 that, if you looked closer at them, you wouldn’t want to own.

But you’re owning them equal weight and you’re owning pieces at market-cap weighted. So automatically, companies that aren’t doing well get capital. That creates misallocations in the market, but really, it creates opportunities like we’re seeing now.

EQ: Last year was one of the few years in which large caps outperformed small caps. Do you see a potential reversal of that this year?

Maltbie: All of last year, as investors felt the market risk and for other reasons, we saw money flow out of small caps and into big caps because of ETFs. We saw the earnings improve, but the valuations go down. So if you do the homework, you’ll find the opportunities this year. If you look at the stronger dollar, it is impacting the multinational blue chips like your Johnson & Johnsons (JNJ) , your Procter & Gamble Cos (PG) , and your Merck & Co Incs (MRK) . They have a lot of foreign exposure. The dollar is hurting their competitiveness and their earnings on a currency basis.

Also, here in the U.S., we’re benefiting from lower taxes, lower oil prices, which serves as a de facto tax cut. It’s meant to be a big amount, around $150 billion with this big fall in oil. So with those elements in place, we think that it’ll be a very favorable year for what we do and for small-caps. Selectively, we’re looking for growth and value, especially with valuations.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


Symbol Name Price Change % Volume
BABA Alibaba Group Holding Limited American Depositary 104.22 -0.28 -0.27 8,985,668
JNJ Johnson & Johnson 113.96 0.35 0.31 5,594,989
MRK Merck & Company Inc. (new) 61.95 1.20 1.98 15,188,534
PG Procter & Gamble Company (The) 86.97 2.87 3.41 20,761,155


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