Secrets to consistency in small cap investing
Investing in smaller companies is fertile ground for active managers, but small cap stocks can be volatile – how is it possible to achieve consistency?
There are few managers better placed to answer this question than Richard Ivers and Mike Younger, Portfolio Managers for the Prime Value Emerging Opportunities Fund, which has outperformed both the Small Ordinaries and Small Industrials indices for each of the last six years.
The Prime Value Emerging Opportunities Fund has delivered 11.5% after fees per annum to investors since inception in 2015, with outperformance across some of the most unpredictable events in recent market history.
This includes a global pandemic, the fastest bear market in history, a stunning rebound, record low interest rates, an inflation break-out, and the most rapid interest rate rises in history.
Mike Younger said a fundamental principle for small cap success is sticking to your guns. “It’s important to have a grounded process with some principles for portfolio construction and stock selection, and to stick with them even when the market looks to be losing its head.
“We actually like some volatility in the market because it means some of our favourite companies are occasionally on sale.
“But there needs to be a sound investment philosophy and process to help look through the cycle, and turn short-term volatility into longer-term opportunity.”
Investment principles include limiting exposure to higher risk stocks, and looking for companies with strong management, a sound balance sheet, and good cash flows.
Markets see-saw in 2024
If ever investors needed a reminder of how volatility can impact small cap stocks, it has been shown over the last six months as markets see-saw on interest rate anxiety.
“The difficulty of trying to pick the cycle has been highlighted in 2024. In early 2024 there was confidence of rate cuts later this year causing many to buy retail stocks in anticipation of an upturn.
“That positive sentiment reversed in April due to a high inflation numbers that delayed rate cut expectations and some weak company trading updates.”
Retailer Premier Investments rose by around 15% in February and March, ahead of a 15% decline in April and May. Former market darling, Baby Bunting, was also punished by the market recently, dropping 35%.
Richard Ivers says making the most of such pull-backs comes down to being extremely selective. “You can never count on a rising tide lifting all boats, particularly in smaller companies where stock picking is more influential on performance.
“The only way to capitalise on these situations is to have an eye firmly on the medium-to-long-term, and to know the companies you are buying very well”, Mr Ivers said.
Commitment to process
The best way to achieve investing consistency is by playing to your strengths through discipline and process, according to Mr Younger. “We know what works for us in small cap investing, whether it’s a portfolio construction decision we need to make, or a stock selection decision.
“The market may fluctuate but if we don’t deviate from our process then we give ourselves the chance to outperform across different market conditions.”
A major part of Prime Value’s small cap approach is making contact with companies directly. Richard Ivers says it’s not uncommon for the small cap team to conduct 1,000 meetings with companies across the course of a year.
“We aim to meet with companies every day, it’s part of our approach and discipline, and we value the opportunity to hold these meetings very highly.
“We are always looking for long-term investment. We are looking at these companies as potential partners, and there is great opportunity in getting to know them better.”
The Prime Value Emerging Opportunities Fund was recently upgraded to Highly Recommended by investment research house, Zenith Investment Partners.
To invest in the Prime Value Emerging Opportunities Fund please contact our Client Services Team at info@primevalue.com.au and 61 3 9098 8088