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Equity Ascent Index Small Cap Sleeve
Sleeve logic and construction process.

High-growth private companies no longer IPO as small or micro caps. They use private-market capital to scale, entering public markets as mid or large caps. Optimal small cap exposure therefore focuses on established, well-run companies priced at a discount.

This sleeve uses a custom scorecard to select companies with the strongest combination of value and quality, then applies a momentum filter to screen out potential value traps.

Equity Ascent Index - Small Cap Starting Pool
Bottom 10% on capital efficiency already removed · Ready for factor scoring
~540
eligible companies
Step 1 · Score each company on Value and Quality
Every company in the starting pool is evaluated across two dimensions - how cheap it looks, and how well the underlying business operates. Each dimension carries equal weight. The goal is to find companies that are both attractively priced and genuinely well-run - not just cheap, and not just high-quality.
Value
50% of score
Sales / Enterprise Value
Revenue relative to total business value
How much revenue does the company produce for every dollar of its total worth (stock price + debt)? More revenue per dollar of value = potentially cheap.
Book to Price
Net assets relative to stock price
What is the company's balance sheet worth compared to what you pay for a share? A higher ratio suggests you're getting more tangible value per dollar invested.
FCF Yield
Free cash flow per share vs. stock price
How much actual cash does the business generate for every dollar of share price? This is one of the most direct measures of whether a stock is cheap - it measures what the business truly earns, not what accounting says it earns.
Forward Earnings Yield
Expected profits vs. stock price
Based on analyst forecasts: how much profit is the company expected to produce per dollar of share price? A forward-looking complement to the cash flow measure.
Quality
50% of score
Return on Assets
How profitably does the business use what it owns?
For every dollar of assets on the balance sheet, how much profit does the business produce? High ROA means the business runs lean and efficiently - it doesn't need a lot of capital to generate earnings.
Gross Income / Assets
Core business value per asset dollar
How much gross profit does the core business generate relative to total assets? This strips out interest, taxes, and overhead - measuring how strong the underlying product or service is on its own terms.
Buybacks Inverted
Is the company returning cash to shareholders?
When a company buys back its own shares, it's returning capital - a sign of financial confidence and discipline. We reward more buybacks with a higher score. Inverted means: higher buybacks → better score.
Accruals Inverted
Are reported earnings trustworthy?
Accruals measure the gap between what accounting reports as earnings and what the company actually collected in cash. A large gap is a warning sign - it may mean earnings are being inflated. Lower accruals = more trustworthy results. Inverted means: lower accruals → better score.
How we put these metrics on a common scale - the ranking score
Each of the eight metrics above is measured in different units - ratios, percentages, dollar amounts. Before combining them, we convert each metric into a single standardized number that answers: how far above or below average is this company, compared to its industry peers? This standardized number - called a ranking score - lets us fairly add metrics together that would otherwise be incomparable.
−3
−2
−1
0
+1
+2
+3
Well below average
Average
Well above average
A score of zero means exactly average for its industry. A score of +1.5 means meaningfully better than most peers. A score of −2.0 means well below the peer group. Every metric gets converted to this common language - then we take a simple average across all four value metrics to get one Value score, and across all four quality metrics to get one Quality score.
⚖️
Why we compare within industries, not across the whole market
A community bank with a Book-to-Price ratio of 0.9 means something completely different from a software company with the same ratio. Banks are supposed to trade close to book value; software companies almost never do. Each company is ranked only against companies in its own industry group (using the RBICS sector classification). This ensures a homebuilder is competing against other homebuilders, not against pharmaceutical companies, for its ranking score.
Step 2 · Combine scores - and apply an intentional asymmetry
The Value score and Quality score are combined 50/50 into a single composite score. Then a deliberate adjustment is applied that treats good and bad scores differently - on purpose. The philosophy: avoiding bad companies matters more than finding exceptional ones.
Why the asymmetry?
Imagine a hiring process where passing a background check matters more than having an impressive resume. A stellar resume doesn't overcome a failed check - but passing the check doesn't guarantee you get hired either. This adjustment works the same way: above-average companies get a modest boost; below-average companies face a steep penalty the further they fall below the middle.
Above average (score > 0):
Adjusted = 1 + score
(modest, linear boost)

Below average (score < 0):
Adjusted = 1 ÷ (1 − score)
(accelerating penalty)
What this looks like in practice - raw score → adjusted score
+2.0 raw
→ 3.0
3.0 ↑
+1.0 raw
→ 2.0
2.0 ↑
0.0 raw
→ 1.0
1.0 -
−1.0 raw
→ 0.5
0.5 ↓
−2.0 raw
→ 0.33
0.33 ↓↓
A company at +2.0 gets a score of 3.0 - a 50% boost. A company at −2.0 collapses to 0.33 - less than one-ninth of the top score. The gap between being excellent and being poor is far wider on the downside.
Step 3 · Remove the value traps with a momentum filter
Sometimes companies are cheap for a reason. These are called value traps. The momentum filter catches them by assessing stock price movement. Companies with poor relative momentum are removed before final selection.
Three momentum signals
12-Month Price Trend
Has the stock been rising over the past year?
We look at the stock's return over the past 12 months, skipping the most recent month (which is often noisy). A persistently rising stock suggests the business is doing something right. Adjusted for how volatile the stock is - a calm, steady 15% gain signals more than a rollercoaster that happened to end up 15% higher.
6-Month Price Trend
Is the trend still holding more recently?
Same logic as the 12-month signal, but over a shorter window. Helps identify if momentum is fresh and continuing - or if a stock was rising a year ago but has since stalled or reversed.
3-Month Earnings Estimate Revisions
Are analysts raising or cutting their forecasts?
When professional analysts covering a company revise their profit forecasts upward over the past three months, it usually signals the business is performing better than expected. Downward revisions are a warning sign. This bridges price signals with underlying business fundamentals.
What gets filtered out - and why
Companies are ranked by their combined momentum score. The bottom 20% - those with the worst combination of price trend and analyst estimate direction - are removed entirely, regardless of how good their Value or Quality scores look. The two remaining momentum categories (middle 60% and top 20%) remain eligible for final selection.
What a value trap looks like
A specialty retailer trading at a low price-to-earnings ratio - looks cheap on paper. But same-store sales have been declining for six quarters, analysts have cut earnings estimates four times in a row, and the stock has drifted down 30% over the past year. The value metrics say "buy." The momentum filter says "the market knows something you don't." The company is removed.
Filter result - 540 companies in → 432 remain eligible
Top 80% by momentum - 432 remain eligible
20% Removed
Illustrative examples at the momentum filter stage
Passes Filter
Hanover Insurance Group
Commercial & specialty P&C · Disciplined underwriting
Value score
Above average
Quality score
Strong - high ROE, low accruals
12-mo trend
Rising steadily
EPS revisions
Analysts raising estimates
Cheap relative to peers, runs a tight operation, and momentum confirms the market is recognizing this. Not a value trap - the stock is rising because the business is improving.
✓ Advances to final selection
Removed - Value Trap
Big Lots
Discount retail · Secular revenue decline
Value metrics
Looks cheap - low EV/Sales
Quality score
Weak - negative ROA
12-mo trend
Declining sharply
EPS revisions
Analysts cutting estimates
Revenue shrinking, losses widening, and estimates being cut - the stock looks statistically cheap only because its business has deteriorated. The momentum filter correctly identifies this as a value trap and removes it before factor scoring can mistakenly elevate it.
✕ Removed - value trap identified
Step 4 · Select the top companies and protect against unnecessary turnover
Selection Rules
New entrant threshold · Top 20%
A company must rank in the top 20% of the sleeve universe by composite score to be newly added to the index. Only the highest-scoring companies on the combined Value + Quality measure advance. (~108 companies selected)
Existing holding buffer · Top 40%
A company already in the index does not need to rank in the top 20% to stay - it can remain if it still ranks within the top 40%. This prevents a company from being sold and potentially repurchased the following quarter due to minor ranking fluctuations.
If still short of target count
If fewer than the target number of companies meet both rules, the highest-ranking eligible companies not yet selected are added to reach the target. The count floor is maintained.
Step 5 · Assign a weight to each selected company
Each selected company is assigned a weight based on two things: how strongly it scored on Value and Quality, and how large it is by free float market cap. Companies that score better get proportionally more weight. Larger companies also receive more weight - but unlike a pure market cap index, a higher-scoring smaller company can outweigh a lower-scoring larger one.
Weight = Adjusted Score (Z) × Free Float Market Cap
Adjusted Score (Z): The asymmetric composite score from Step 2 - captures how good the company is on Value and Quality combined. Scores range from roughly 0.25 (weak) to 3.0+ (exceptional).
Free Float Market Cap: The total value of shares actually available for investors to buy and sell (excludes locked-in insider stakes). Larger, more liquid companies naturally receive more index weight - but it's modulated by the quality score.
How this differs from other weighting approaches
Pure market cap weighting (like the S&P) gives the most weight to the most expensive companies - regardless of quality or value. Pure equal weighting ignores size entirely and creates liquidity problems. This approach gives more weight to both quality and size - so a top-scoring smaller company can compete with an average-scoring larger one.
S&P approach
Pure market cap - largest market cap gets most weight with no assessment of merits
Equal weight
Same weight for all - ignores size; treats all companies as equals
Equity Ascent
Score × market cap - quality and size both matter; neither dominates alone
Output - Small Cap Sleeve · Equity Ascent Index
~108 Small Cap Holdings
Best value + quality combination from the small cap universe
Value traps removed via momentum filter
Stability buffer reduces unnecessary turnover and costs
Weighted by quality score × size - not pure market cap
Leverages the unique contribution small cap is best positioned to contribute (now that high growth IPOs have shifted upmarket)
20%
of the final index weight
Large Cap: 60% ~ 200 equities
Mid Cap: 20% ~ 72 equities
Small Cap: 20% ~ 108 equities