WHY SMALL & MICRO CAPS?
In 1964, the average company's lifespan on the S&P 500 Index was 33 years. It is forecasted to be just 12 short years by 2027 (Innosight - 2018 Corporate Longevity Briefing). We are passionate about seeking out the next set of emerging companies and unlocking this opportunity for our investors.
While our mandate allows us the flexibility to invest across the entire ASX regardless of size, the bulk of our time will be spent analysing small and micro-cap companies. This is where we believe the market is most inefficient and our business edge approach has the most potential. Whilst definitions vary, generally:
• A small cap company – market capitalisation between $100 Million - $1 Billion
• A micro cap company – market capitalisation up to $100 million
We will predominantly target this part of the ASX for the following reasons:
In the last 20 years to March 2020, the Median Australian Large Cap Manager generated 8.7% p.a., whereas the average Small Cap Manager generated 10.6% p.a (Source: eVestment, March 2020, Past performance is not a reliable indicator of future performance).
Companies are small and illiquid meaning institutional managers cannot easily purchase shares in these businesses. A research paper published by Roger Ibbotson of Yale University (“Liquidity As An Investment Style”) found a positive correlation between performance and illiquidity looking at 3,500 companies since 1971 to 2011.
ENTREPRENEURIAL ASSET CLASS
Small & micro-caps are highly dynamic entities. Understanding the nuances of running small businesses is very important. As such, we believe the business edge approach is far superior to that of an institutional mindset.
The smaller the company, the more important management is. Having direct access to the capital allocators is key.