We aim to exceed the return of the benchmark on a three-year rolling basis. We invest in smaller companies in developed markets (North America, Europe, Australia, New Zealand, Japan, Hong Kong and Singapore). The strategy is benchmarked against the MSCI World Small Cap Index.
Focusing on the quality of companies is a core element of our philosophy. We employ a multi-factor appraisal methodology which looks for and evaluates characteristics such as a durable competitive advantage and sustainable growth. As a result, the strategy aims to generate a high return on equity and high stability of returns compared to the benchmark. Our strategy is deliberately long-term focused. This is, we believe, an important factor in generating alpha from small caps: such an approach is necessary to capture the market-share-gain phase of successful smaller businesses, and to take advantage of market short-termism.
Stock ideas are sourced from our regional small-cap portfolios. This effectively narrows the universe from more than 4,200 stocks to about 250. We undertake a large number of company meetings and overseas trips each year to find new ideas and monitor existing holdings. Each potential investment is peer-reviewed, with the lead manager ultimately determining stock selection and portfolio construction. The fund consists of 50-70 stocks, which helps to ensure that we focus on the best companies and generate a high active share.
We aim to concentrate as much risk as possible in stock selection – our core competence – while maintaining low exposure to sector and geographical risk as this, we believe, generates superior risk-adjusted returns.