Video: 10-Year Anniversary Review and Outlook

Transcript

What has ten years of micro-cap investing taught you?

Ken Wotton: Over ten years of investing in micro caps, what it’s really taught me is that you’ve got to have the courage in your convictions. You’ve got to build really high conviction in the companies that you focus on and if you can do that those companies can continue to deliver value for the Fund and for investors over a very protractive period. We’ve got some businesses; Next 15 Communications, Mattioli Woods, to name a couple, that we have had throughout the life of the Fund and have continued to deliver and we still think they’ve good prospects of continuing to deliver shareholder value going forward.

I’ve learnt a lot about managing risk in this part of the market because inherently smaller companies are higher risk than well developed. But by having really clear disciplined processes about what you do and don’t invest in from both a sector point of view and financial characteristics you can really mitigate a lot of the risks and then it’s really down to do you pick the right companies and the right management teams to back.

Brendan Gulston: Our style of investing is really being a long-term supportive shareholder. An example of a business that we did a lot of work on and that was a great investment for us is a company called Alpha FX, which is a corporate currency services business, and we met them a number of years before it did an IPO and we did quite a lot of work on the sector and spent a lot of time with management. That was a really high conviction investment case that we managed to build up and it’s a great success story for us.

Ken Wotton: Next 15 Communications is a digital marketing agency specifically focused on technology companies. So companies like Facebook, Google, Oracle and Microsoft are their clients. It’s international in scope but we were able to get some real insight into the people through our network and also how they do things and some of areas of their business that 10 years ago were quite ground-breaking and now digital marketing is what everyone is talking about. It’s easy to forget that 10 years ago the technology was still relatively in the early stages.

Why is research so vital?

Ken Wotton: It’s really vital in the area of micro caps to doyour own research. MIFID II has exacerbated the issue but it’s been the case really for a long time. There is very limited research coverage from sale side equity analysts at the bottom end of the market so if you really want to understand the company there is no substitute for meeting the management team yourselves directly and asking them face-to-face about their strategy and the opportunities in their business and then not taking what they say at face value and really trying to triangulate and understand from third-party sources to corroborate and validate what you are being told.

Where we have had a real competitive advantage over the years is by being part of private equity firm and having access to this private equity platform and network. We’ve been able to find pre-qualified experts through our network and really help us to evaluate a niche market, the business model, or to reference people and understand their track record properly and that really has been one of the key parts of our success.

What do you look for in the stocks you select?

Brendan Gulston: Businesses that we invest in are micro cap, they are smaller businesses. What determines the success or failure of these businesses is ultimately quality of management, their strategy; have they executed on a similar strategy before, do we think they can do this again?

It’s great being invested at this end of the market where the businesses that you are backing are genuinely innovative and they are always doing something different in the market or they’ve got a product or a capability that has something about it that’s a real hook and its really interesting so I think it will continue to be an exciting time. It will continue to be a great opportunity to find investments and we will continue to stick to our principles and our approach and our process to really find those opportunities that fit with our themes and that fit with our investment style and then do the work and really drive conviction in those businesses to make good investments.

What trends do you see for micro caps over the next ten years?

Ken Wotton: I think that the one thing that’s safe to say about the next 10 years is that there is always going to be something happening. In micro caps it’s the engine room of the UK economy, it’s smaller companies run by entrepreneurs, people making things happen. I can’t predict precisely which areas are going to be in favour and which aren’t but what I can be very very certain about is that there are going to be some really exciting, entrepreneurial, growth businesses within our universe and we will continue to be able to find those over the next 10 years.

Past performance should not be considered an indicator of future performance. The view expressed in this video are of the individuals involved and do not necessarily reflect the views of Gresham House.