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Maintaining conviction in smaller companies - the fundamentals
Ken Wotton, Managing Director, Public Equity
8 September 2021
Ken Wotton, Managing Director, Public Equity
8 September 2021
Focusing on small and mid-cap companies and fundamentals-based stock-picking, our multi cap fund aims to deliver attractive returns for investors. Our private equity inspired process is guided by a genuine smaller company focus and we believe this sets us apart from our competitors.
As the old adage goes, bigger is not always better.
And with many small and mid-cap companies persistently trading at significant valuation discounts to their larger equivalents, they can provide fertile ground for uncovering potential winners.
Selecting such winners requires patience, however, along with a commitment to investing in the resources required to undertake suitable levels of research across such a diverse range of businesses. With less attention being paid by research organisations and brokers, many investors simply do not see the vast swathe of high-quality smaller companies available for investment.
Dedicated investors can therefore reap the benefits of this gap by backing innovative and disruptive companies at this end of the market. At Gresham House, every stock considered for investment is interrogated utilising private equity techniques and proprietary research.
A ‘conviction score’ is then awarded to each stock based on six fundamental components.
📈 Company performance
It seems obvious, but we consider the profit and cash flow potential over the life of the investment, as well as visibility of revenues and earnings, concentration risks, vulnerability to external shocks, and the key value drivers.
📌 Market position and business model
We assess the existing company market position, its sustainable competitive advantages and its customer value proposition. We also evaluate the key components of the business model and how it generates returns.
📅 Long-term corporate strategy
We look at the company’s strategic positioning and how management is helping enhance strategic value. We then measure the clarity and delivery potential of the business strategy – and how this links to potential long term value creation.
🔗 Management and shareholder structure
We focus on high quality, entrepreneurial management teams as a key driver of business growth and value creation for shareholders. We analyse shareholder structure, ownership and incentives, as well as alignment of interest with our own objectives.
🎬 The genuine market opportunity
We calculate the company’s realistic addressable market and the trends and sector dynamics likely to affect this in the future. We then look to management to clearly define the opportunity, including how to expand the addressable market – such as through new product development, expansion or acquisition.
💷 Valuation and liquidity
We assess the absolute and relative metrics applicable to the individual characteristics of each company we consider investing in. Valuations are benchmarked against peers, long-term average sector multiples, appropriate situational comparators, as well as public and private company M&A multiples.
It is important once all this has been considered to trust in the process.
Having an internal methodology to qualitatively rate our level of conviction in a stock, as well as rank it against others, enables our experienced team to define the weightings within our portfolio – subject to investment strategy and risk parameters.
During this process, we seek to screen out a substantial proportion of the investment universe carrying binary investment risk.
The combination of our sector focus – business services, consumer, technology, financials, media and telecommunications, as well as healthcare and education – and how we filter opportunities by their underlying profitability, can help to mitigate the inherent risks investing in smaller companies and creates the potential for a winning formula.
Managing Director, Public Equity
Ken is lead manager for the LF Gresham House UK Micro Cap Fund, LF Gresham House UK Multi Cap Income Fund, Strategic Equity Capital plc and AIM-listed portfolios on behalf of the Baronsmead VCTs.
Ken graduated from Brasenose College, Oxford, before qualifying as a Chartered Accountant with KPMG. He was an equity research analyst with Commerzbank and then Evolution Securities prior to spending the past 12 years as a Fund Manager at Livingbridge and now Gresham House specialising in smaller companies.
- The value of the Fund and the income from it is not guaranteed and may fall as well as rise. As your capital is at risk you may get back less than you originally invested
- Past performance is not a reliable indicator of future performance
- Funds investing in smaller companies may carry a higher degree of risk than funds investing in larger companies. The shares of smaller companies may be less liquid than securities in larger companies
This document is a financial promotion issued by Gresham House Asset Management Limited (Gresham House) under Section 21 of the Financial Services and Markets Act 2000.
Gresham House is authorised and regulated by the Financial Conduct Authority.
The information should not be construed as an invitation, offer or recommendation to buy or sell investments, shares or securities or to form the basis of a contract to be relied on in any way. Gresham House provides no guarantees, representations or warranties regarding the accuracy of this information.
This article is provided for the purpose of information only and before investing you should read the Prospectus and the key investor information document (KIID) as they contain important information regarding the fund, including charges, tax and fund specific risk warnings and will form the basis of any investment. The prospectus, KIID and application forms are available from Link Fund Solutions, the Authorised Corporate Director of the Fund (Tel. No. 0345 922 0044).
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