Why RSMR Rate this Fund

• The fund has a strong long term track record and large amounts of resource providing fundamental research

• The portfolio managers focus is governed by their 3G investment framework, looking at a business’s Growth, Go-To-Market strategy and Governance.

• The fund uses a structured framework for stock selection and stocks are sized based on the conviction in the fundamental opportunity.

Fund Process

The investment process requires a high level of fundamental analysis which allows both the analyst and the portfolio manager to understand the drivers of a business. The analysts work in small teams to foster an entrepreneurial spirit within the team.  There is a diverse range of experience within the team from within and outside the financial industry which has driven a greater level of research capability.

The team work to an internally derived ‘3G’ investment philosophy, firstly assessing a business’s Growth opportunity, the durability of the business model, differentiation in products against competitors, market share of the business, market share of the segment(s) in which it operates and the growth of the underlying market. Often investee businesses will be the market leader in their category.

The Governance of a business is crucial in smaller companies where they may be led by founders, and the team seek to understand the board structure and the diversity of the board, their capabilities, minority shareholder treatment and alignment of incentives between the board and the shareholders. The team are cognisant of having strong and credible personnel in the appropriate business area.

Finally, Go-to-Market involves understanding the business model, the profitability and whether the business can scale. A scalable business should offer valuable incremental revenue with a large part of this revenue flowing through to profit. This is possible where companies have a high return on invested capital which can be used to reinvest in the business. This part of the process involves a quantitative element in assessing the company’s track record in order to create a model and future projections for the business. 

The output of the research process is a diversified fund, holding a minimum of 40 stocks. The fund is different to the benchmark which has a high weighting in financials and energy, typically value orientated holdings, whilst the managers are seeking growth companies.

Evaluation

The fund should perform well when investor sentiment and economic growth are positive. Small caps should benefit coming out of an economic downturn and at the end of earnings downgrade cycles. Stock selection should enable to fund to perform positively when companies are growing earnings, whilst its growth tilt should be beneficial over most of a business cycle and an expansion in multiples. The performance of the fund is not insulated from negative macro events or when sentiments towards small caps and growth wanes.

Application

The fund can be used as a satellite holding across a range of risk profiles, but care should be taken to size the position appropriately. The fund could also be used as a core holding for higher risk clients seeking long-term growth and who can withstand periods of volatility that may occur within the small cap universe.

Our Opinion

The fund makes use of a vast amount of resource and a team that has been investing in small caps for a number of years. The team’s process incorporates a considerable amount of fundamental analysis in order to understand the opportunity set and how a company can fulfil its ambitions. This qualitative assessment is combined with a quantitative assessment of the business and the market it is operating in.