Richard Ivers is a portfolio manager with Prime Value Asset Management, who has over 16 years’ experience investing in smaller companies. Richard is responsible for our small/micro cap fund, the Prime Value Emerging Opportunities Fund – Class A.
The Fund has performed strongly during a difficult time on the markets: since May 2018 the Prime Value Emerging Opportunities Fund – Class A has beaten its index (Emerging Companies Accumulation) by 20% and is currently topping its peers for performance. During this period the Fund has delivered a +6.6% return, after all fees, compared with the Emerging Companies Accumulation Index of -13.4%, putting it at the top of its peer group.
Since inception in October 2015, the Prime Value Emerging Opportunities Fund – Class A has returned 10% per annum to investors.
So what makes Richard tick? He answered some key questions on his Fund and what he looks for in an investment:
What attracted you to investing in small and micro-cap stocks?
The sheer number of small and micro stocks makes it a fascinating area to cover and presents a very large range of investment opportunities. So there’s always an opportunity to make a good return for our clients, it’s just a matter of doing the work and making the right calls. Additionally there are typically very high growth companies that can deliver fantastic returns.
Who has influenced your career to date as a stock picker?
Working as a small cap stockbroking analyst for many years I would regularly discuss stocks with most Australian small cap fund managers. I learned a huge amount from them and the ones that stand out had three key attributes: first, they met a lot of companies to ensure they had a broad understanding of the small cap market; secondly, distilled this large amount of information into a few keys issues that drive each stock and had a keen eye on business quality; and finally are willing to back themselves and invest as opportunities arise while not taking on excessive risk as the unexpected does happen.
I’ve also learnt a lot from global bond and absolute return investors like Howard Marks, Ray Dalio and Jim Chanos who have a sharp focus on protecting against the downside. Equity investors have a tendency to be bullish and focus on the upside so I find they provide a good balance.
What is your over-riding investment philosophy?
Growth at a reasonable price (GARP) is our style bias. In other words we invest in growing companies but don’t overpay for them. We also have a strong focus on capital preservation which has been illustrated in the recent market volatility when we performed particularly strongly in months when the market fell.
Why has the Fund avoided the worst of the current correction?
We stay true to label and don’t invest in excessively valued companies. Nor do we invest in highly speculative companies that get hit hard when markets become risk-averse. At a stock specific level, the AGM season was good for us with trading updates largely positive which helped performance and really comes down to stock picking.
How do you choose which stocks to invest in, and which to avoid?
Firstly by assessing the quality of the company and its management. Next comes the earnings outlook and valuation. And finally by determining the right fit for the portfolio which is heavily focused on risk management. We’re looking for companies where we have a high level of earnings certainty over 3 -5 years. If we can get the long term right, the market will inevitably ascribe value to the stock and our investors will do well.
Which stock picking myths would you like to see eliminated for all time?
That business quality is determined by size. There are some great quality small-cap companies and some low quality, large-cap companies. The over-use of EBITDA multiples for valuation – DA (depreciation & amortisation) is typically a real cash cost in the form of capex.
What are the biggest mistakes investors make when choosing small cap stocks?
It’s quite common to extrapolate current rates of earnings growth into perpetuity. This typically happens when business quality is over-estimated. Most companies have their day in the sun at some point, it doesn’t make it a good long term investment.
Which stocks/sectors look interesting at the moment, and which are you looking to avoid?
Some high-quality growth stocks have been sold off in the recent market volatility which presents a great opportunity. We’ve been opportunistically buying Infomedia and Baby Bunting amongst others. We’re avoiding highly cyclical companies that are reliant on the domestic economy. And we don’t invest in mining companies or biotech’s as we have a low-risk tolerance.