LF Gresham House Micro Cap Fund Market Outlook 2019

Past performance should not be considered indicative of future performance. 

Transcript

Brendan Gulston: 2018 was a fairly mixed year in terms of equity market sentiment. There were two corrections during the year, one earlier on in the year in February/March and another one more recently, creating a lot of deal flow so its been quite a buoyant market in terms of corporate activity. We have seen quite a bit of M&A (mergers and acquisitions) in the small cap space, we have also seen a lot of IPO’s and some very active deal flow.

Ken Wotton: Looking forward into 2019, it’s very difficult to expect anything other than a continuation of some of the volatility we’ve seen at the end of this year. But we welcome that because volatility brings opportunities in terms of valuation and we are increasingly seeing a lot of opportunities in stocks that we follow very closely, where the valuations are now coming into a range where they may be potential investments again.

Brendan: Our process and how we make investments stays the same, and we have got a very structured and disciplined process which is designed to insulate us from macro factors or external factors that can effect companies performance.

Ken: Smaller companies in aggregate may be perceived to be a higher risk area of the market, and when sentiment is becoming more shaky that could be considered to be a problem. However, our process is specifically designed to try and mitigate some of the risks of investing in smaller companies and that means we deliberately avoid some of the higher risk, more binary outcome kind of investment areas within small cap. We focus on profitable, cash generative, growth businesses which have clearly defined markets, clearly defined business models, and most importantly, quality management teams that can execute on their strategy.

Brendan: We are really optimistic about the long term, and the opportunities in the small-cap space. I think 2019 is going to be a period of volatility and potential uncertainty in the market, but the small-cap space is really interesting, there are lots of businesses – our potential investment universe is massive. There are loads of interesting companies coming to market, lots of companies changing their business models, changing the way they operate; this creates loads of opportunities that come in every day for us to sift through to try and find really interesting businesses that we can back.

Ken: An example of a niche UK micro-cap stock that we have in the portfolio is Impax Asset Management. It’s an asset manager focused on areas of environmental and sustainability in terms of it’s investment strategies. Now while it’s an asset manager which means it’s exposed to equity markets, and that’s something that’s turned off investors in recent months, actually its exposed to some really strong structural drivers as more and more assets are allocated to this type of asset class. So we expect Impax over the next few years to really drive its funds under management which will drive it’s revenues and profits, and if the market sentiment is against it due to it’s equity market exposure in the short term, then actually that produces a good opportunity for us to invest more money behind that company.

Brendan: We’re really excited about the long-term opportunity in the small-cap space and I think from 2019 onwards there will be a lot of great long-term growth opportunities that we will be able to find.