Investment Opportunity

  • Structurally inefficient part of UK market
  • Significant universe
  • Value & Recovery mindset differentiated
  • Active engagement drives shareholder value
  • Material due diligence de-risks and rapidly creates informational advantage
  • Relationships and networks unlock opportunities, hidden value, catalyses change

We believe there is a structural investment opportunity for enhanced returns in small cap equities. This has been proven across geographies, over history and is clearly 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 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 through the application of a ‘value’ philosophy and the avoidance of excessive risk through the application of company research and due diligence.

Stock market dynamics have enhanced the opportunity within this universe of nearly 1000 companies. A reduction in company research coverage in recent years (due to a combination of collapsed commission fees and MIFID2 regulations) has occurred and institutional interest has reduced, due to higher market concentration within a small number of large institutions, whose huge scale prohibits them from considering a large part of the universe due to liquidity requirements. As a result, we believe there is a structural opportunity to find outstanding investment opportunities in an inefficient market place, 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 out of favour status relative to history of the UK stock market relative to 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