Small Cap bias
The Manager is of the view that most bargains exist outside of the large caps. The majority of small cap managers in Australia have significantly outperformed the small cap index as well as large caps over time. Evidence in the US of significant outperformance by small cap managers is also compelling. We believe skilled small cap managers are able to outperform the index in the long term due to the following:
Wider opportunity set – Small and micro caps significantly outnumber large caps on most stock exchanges.
Less efficiently priced – Fewer analysts and investors cover small and micro caps and as a result their prices are less likely to reflect true value. A skilled manager should be able to take advantage of these pricing inefficiencies to significantly outperform large caps over the long term.
In the small cap space we believe that if one looks hard enough, it is possible to find the holy grail – a quality, growing business at a bargain price, sometimes with downside protection. In the large cap space, the combination is extremely rare.
Focus on absolute returns and capital preservation
Most equity funds operate under mandates requiring full equity exposure at all times. This can be a severe constraint, especially when the market is overpriced, as it forces the funds to buy equities regardless of whether they offer value in absolute terms. In the case of this Fund, no such constraints exist. To the extent that we cannot find bargains, we will hold cash.
The approach aims to deliver attractive absolute returns whilst mitigating risk and protecting capital over the long term.
Not index constrained
Most mainstream investment funds “hug the index” (hold a portfolio that resembles the index in order to avoid the risk of material index underperformance) and are unlikely to completely avoid stocks with large weights in the indices regardless of their view of absolute value for those stocks. In contrast, this Fund operates without concern for equity index composition focusing purely on absolute value on a risk-adjusted basis.