The Prime Value Emerging Opportunities Fund – Class A is currently topping the tables amongst its peers for performance.
The Fund, which invests in small/micro-cap stocks across the ASX puts just as much effort into ‘managing the downside’ as it does in picking good stocks.
Richard Ivers, portfolio manager for the Prime Value Emerging Opportunities Fund – Class A, says the Fund employs a ‘growth at a reasonable price’ (GARP) strategy. “Stock picking has been the driver with a strong emphasis on managing risk.
“We’ve avoided major blow-ups and invested in reasonably priced companies so we’ve weathered the recent sell-down very well. The largest single holding at any point has been 6% and we have avoided some of the riskier sectors such as mining stocks.
“We have backed ourselves by taking largest positions quickly when opportunities arose, and expect more buying opportunities as the market continues to stutter.”
Since Mr Ivers joined Prime Value just six months ago the Prime Value Emerging Opportunities Fund – Class A has beaten its index (Emerging Companies Accumulation) by 20% during a challenging time on the markets.
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 11.3% per annum to investors (to 31 October 2018).
Managing the downside critical to producing returns
The current market correction is a good reminder about how important ‘managing the downside’ is to overall investment returns. “It’s seductive to put too much focus on selecting big winners, but avoiding poor performers is often more influential on returns.”
He said investors must remember the old rule if you lose 50% of your capital, you then need a 100% return just to get back to where you were.
To further demonstrate why investors shouldn’t be complacent about managing the downside, consider a 10% drop in capital requires a 11.1% return to reach the same level as before. Likewise, if it drops 20% you need a 25% gain just to return your original capital.
Mr Ivers said other figures show how a sharp downturn can punish the investment returns you have already made. Consider that:
A 20% fall can wipe out a 25% gain
A 40% fall can wipe out a 67% gain
A 50% fall can wipe out a 100% gain
History shows there are times when stock market indices will fall dramatically. The current correction, from September to December 2018, has wiped 13% from the ASX 200 index.
The most savage example in recent memory occurred during the GFC, when the ASX 200 dropped by close to 50% in a relatively short period.
Mr Ivers said the latest market falls are a good reminder to investors that active investing strategies can add value. “The case for active management strengthens during tough market conditions. There always needs to be a good balance between managing the downside and identifying good buying opportunities.
“Passive strategies look good when markets are stable and rising, but can be exposed during corrections with a long-lasting impact on performance.”
The Prime Value Emerging Opportunities Fund – Class A is currently open to retail investors.