What?
An index and style-agnostic global equity strategy focused on genuine smaller companies with the potential for exceptional upside. The objective is to generate significant capital appreciation that outperforms broad global equity market indices over the long term.
Global Small Cap
Global Small Cap
Why?
We believe smaller companies indices are particularly poor benchmarks for strategies. Their construction tends to result in a significant bias towards what we regard as medium to larger companies, particularly in the US. It results is significant differences between the size of what is defined as “small” in different countries, which makes no sense to us from a “global” perspective. Whilst typical index construction flatters the optical capacity in strategies we believe a smaller companies strategy should not invest in companies above US$10bn market capitalisation at cost. The reason to invest in smaller companies is to capture higher returns from investing in a universe that is less well researched. A concentrated portfolio ensures individual stock ideas can have a meaningful impact on portfolio performance and we reject the notion that smaller companies strategies need to invest in lots of companies in order to achieve appropriate diversification.
How?
The strategy has three core facets:
Focus on companies that provide a positive asymmetry of outcome from the following characteristics: scalability, incremental ROIC, strong free cash flow (FCF), and sustainable business moats, all culminating in providing upside potential and a margin of safety on the downside.
A proprietary 'red flags' checklist based on over 1,500 recorded investment “mistakes” made by investment professionals on both the buy-side and sell-side.
Diligently manage the investment thesis in each case to ensure the checklist scores remain on track towards the 5- and 10-year returns framework for each portfolio company.
Rather than deploy screening to identify investment candidates the portfolio focuses on companies with specific features that are consistent with exceptional long term performance. If a stock does not have the potential to generate 5x return over 5 years or 10x over 10 years we will not invest. This business model and analytical focus allows us to triage investment ideas quickly to exclude many companies and focus our fundamental research on a select group of companies with compelling potential. The framework for structuring the portfolio seeks to diversify risk effectively across multiple different types of situation and business model without recourse to any consideration of market index composition.