It’s a daunting prospect leaving the 20-year safety of working at two large and very well respected institutions in Fidelity and Capital to join a smaller boutique. Although the holiday quality has been downgraded (!), I have no doubt that it was the right move. Goodhart is the entrepreneurial company I hoped it would be, that supports and encourages a differentiated approach to build something I truly believe in. I am especially pleased (and relieved!) about the quality of people, both professionally and personally as you never really know until you get your feet under the desk.

Many people have challenged me on the move from these huge fund managers (with a global research team, 100s of investors sharing knowledge, the resources to do everything) to a small boutique. I would be lying if this thought hadn’t crossed my mind too. Whilst those benefits are true in theory, the reality is much more nuanced and balanced (and I am realising perhaps quite the opposite). In my experience, one of the greatest resources of a small-cap investor is time. All my time is now dedicated to the fund and its investors. This time is now incredibly focused and with a powerful dynamic; unconstrained hunger, without the need to do investment work / meetings for other reasons. This fund focus was perhaps 60% before.

Likewise, we are starting our processes, technology, use of AI with a blank sheet of paper without the “legacy debt” as a technology company would describe it. The process and systems are designed by us and for us. Finally, one major benefit of a 20-year career at these places is the wonderful network I have built globally of top quality investors; EM, small cap Asia, Japan, Canada, US microcap to name a few. These impressive investors know their market incredibly well and I don’t feel like I am missing out on the idea flow that I had previously. Overlaying my framework with their top ideas has yielded great results and probably represents c25% of the idea generation of the portfolio. Instead, I would actually argue that the ability to generate superior long term investment outcomes for the shareholders is greater at a small boutique that is well resourced technologically and with top quality people, especially with the transferable process discipline, experience and learnings from these impressive institutions.

Our mission is to identify the world’s most promising smaller companies, the next generation of multi-baggers[1] and own them early in their lifecycle and before the crowd. I am excited about the holdings across the fund and believe many of them have meaningful long-term potential based on their business models and market positions. Some of these like Boku, I have held in the past and have known them for years. Others like Zedcor (also a big position) I only met in the last 4 months. Encouragingly, the vast majority of the companies in the fund have seen significant insider buying in recent months suggesting that the people closest to the companies also feel they are undervalued.

My goal is to take the benefits of the quantitative data to build a ‘pipeline portfolio’ of 200-300 companies, like a quant fund would and then layer on top all my qualitative analysis and experience within the multi-bagger framework I have built. I feel like this gives me the best chance of success and also maximises my “return on time” (critical in small cap), allowing me to dedicate the required time to really kick the tyres on the companies in the portfolio / shortlist. The quantitative and qualitative data we have collated, alongside the extensive case studies to support my belief in the strategy. This work doesn’t stop here and supported by our in-house tech expert, I want this strategy to keep improving, evolving through perpetual innovation and a long-term orientation. As we see the results of this first-hand (both in the fund, the shortlist and those companies discarded) we will keep honing the process and lessons learnt. We need to remain honest about failure (it will happen) and learn from mistakes. I will not shy away from these and plan to discuss these mistakes openly in my letters. My own personal capital, career and reputation is tied to this fund and like one of the key filters in identifying multi-baggers, having this alignment will ensure the best possible results for fund holders. Small cap, if done well should reap superior gains (see top quintile of stocks by sales growth, margin expansion and CFROI below). I believe this approach offers the best chance of achieving this.

The biggest challenge for me is perhaps the discipline of holding onto the winners; Watering my flowers and cutting my weeds. Doing nothing is often the best trading decision. I have seen this first hand at Fidelity (where my trimming ended up costing me 1,200 bps over 4 years!)[2], experienced the culture of this approach at Capital and have read the academic literature on it (one of the biggest detractors for active fund managers). However, it is easier said than done when a stock has doubled and the valuation looks a bit stretched. My approach to support this is:

• Being aware of the data and importance. This alone should reduce the headwind and ensure I am thoughtful about my selling process.

• Seeing the upside on a 5- and 10-year basis highlights the potential yet to come.

• Discipline around tracking my waypoints for each thesis and only selling for a change in thesis with a high bar for trimming / selling due to valuation reasons.

  
  

Some of the other areas of apprehension relate to perception of the fund, which I am hoping should dissipate over time. For instance, I do worry that people view the multi-bagger focus as taking on additional risk (it is what economic theory says) and that you can’t have excess return without excess risk. I want to challenge this assertion, but this needs to be proven over time.

Risk management remains a key feature of the bottom-up stock-picking and portfolio construction, especially given the attractiveness of the upside across the holdings. I have included a downside risk discipline within the framework to mitigate this as much as possible. These include:

• No concept stock rule

• Only profitable companies

• Position size based on downside protection and certainty of outcome

• My red flag audit system (Sentinel) based on >1,500 investment mistakes collated over 20 years from colleagues, buyside contacts and >100 sell-side analysts / sales people.

Other risk factors include valuation risk, economic sensitivity and factor risk. I don’t see much valuation multiple risk given the average multiple on PE in the high teens given the high DD growth on offer. Although I don’t think beta is a good measure of risk, the fund is around 1x, and I think the economic sensitivity should be lower than the market as a whole. Finally, the factor exposure is well balanced across growth, value and quality as can be seen below. This was an output rather than planned but highlights that there are many different ways to get to a 10 bagger.

Thank you to all investors who have shown support, especially at this early stage. I plan to write a monthly letter, updating investors and potential investors on the fund, the process, lessons learnt and interesting themes and topics that I think are worthy of discussion. As ever, I always welcome feedback and questions so please feel free to get in touch.

[1] References to potential “multi-baggers” or similar terms reflect the portfolio manager’s opinion only and should not be interpreted as a projection or guarantee of future performance.

[2] This example is anecdotal and does not represent the performance of any Goodhart fund.