Investment Opportunity
ENHANCED RETURNS
We believe there is a structural investment opportunity for enhanced returns in small-cap equities.
This has been proven across geographies and over history, and is evident in the UK as demonstrated in the research of Dimson & Marsh and the long-term performance of both the Numis Small Companies Index (bottom 10% of the UK stock market, re-calculated annually, back to 1955) and the Numis 1000 Index (smallest 1000 UK-listed companies).
The causes of this long-term outperformance are believed to be due to the premium received for faster-than-average growth (“Elephants don’t gallop”), an illiquidity premium and a risk premium for aspects such as immaturity and reduced funding options.
We expect an additional return through the selection of better-than-average small-cap stocks, combined with the application of a ‘value’ philosophy and the avoidance of excessive risk through company research and due diligence.
Structurally inefficient part of UK market.
Differentiated value and recovery mindset.
Accessing enhanced returns by additional discount in public markets for lower liquidity.
Material due diligence de-risks investments and creates informational advantage.
Relationships and networks unlock opportunities, uncover hidden value, and catalyse change.
Significant universe of under-researched companies.
The Small-Cap Effect
Stock market dynamics have enhanced the opportunity within this universe of nearly 1000 companies.
A reduction in company research coverage has occurred in recent years, due to a combination of collapsed commission fees and MIFID2 regulations. Institutional interest has reduced driven by higher asset concentration within a small number of large institutions, whose huge scale and liquidity requirements prohibit them from considering a large part of the universe.
As a result, we believe there is a structural opportunity to find outstanding investment opportunities in an inefficient marketplace, with over-looked and misunderstood companies, whilst still benefiting from the established ‘small cap effect’. (Fama & French ’93)
In the near term, the opportunity is further enhanced due to the sectors’ out-of-favour status relative to both UK stock market history and global (mainly the US) stock markets. The UK discount started widening following the calling of the Brexit Referendum in 2016 and has since increased, with investor flows chasing the momentum of US technology mega-caps. Relative performance has, notably, recently finally started to invert. Timing is auspicious.
“I limit my efforts to relatively inefficient markets where hard work and skill will pay off best."
Howard Marks