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‘Like hand-to-hand combat’: Ellerston Capital shed light on successful Australian small and micro cap investing

September 8, 2021

‘Like hand-to-hand combat’: Ellerston Capital shed light on successful Australian small and micro cap investing

The small and micro cap segment of the market is full of opportunities to find great new companies, but finding the right ones requires a very hands-on approach, according to Ellerston Capital’s David Keelan and Alexandra Clarke.

The small and micro cap segment of the market is full of opportunities to find great new companies, but finding the right ones requires a very hands-on approach, according to Ellerston Capital’s David Keelan and Alexandra Clarke.

Speaking to Reach Markets ahead of their presentation for the fortnightly The Insider: Meet the Manager webcast, the pair likened the process to hand-to-hand combat.

Unlike large and mid cap companies, which are often covered by numerous analysts and already receiving attention from investment banks and institutional investors, small and micro cap investors must do a lot of prep work themselves.

“We’re meeting with unlisted contacts, we’re meeting with suppliers, we’re meeting with companies, we’re walking around sheds whereas in large and mid cap land, everything’s kind of already done for you – there’s all the trips, all the tours, all the meeting events and you just sit back and make notes.” Mr Keelan noted.

“It’s like hand-to-hand combat because you have to prepare the fundamental analysis yourself and go it alone – if something goes wrong you’re possibly one of only two institutions in some of these names, with a bunch of retail investors and a couple of founders.”

Ms Clarke expanded on this idea, adding that in some cases small and micro caps may need or want support and advice from their investors – particularly those who are going through periods of rapid growth.

“Their finance team has to expand, their management team has to expand, their inventory has to expand so their working capital requirements have to be all there. It’s a matter of being able to find those companies that either need capital from us – so we can help with that growth – or be able to articulate that message that growth isn’t necessarily linear,” she said. 

“Alternatively, this could be a regrouping year for them, while they reset the base for the next leg of growth.

“How do you communicate to the market that while we’ve been growing at 50% most years, this year we’re only going to grow 20% but we’re setting ourselves a foundation for the next 4 or 5 years of growth? It’s important that we work with CEOs on how to message that to make sure everyone’s on the same page as to where the business should be going.”

Even so, both Ms Clarke and Mr Keelan said they would never tell a CEO or manager how to run their business, rather they are ready and willing to help when it’s necessary.

All about fundamentals

Pressed on which sectors, industries and themes they like, the two managers said they tend not to start with market trends and work their way down to individual stocks.

“We don’t really focus on sectors,” Ms Clarke said.

“We’re bottom-up stock pickers. We might end up with three or four stocks in the same sector but that’s because we like the fundamentals of each individual stock – we don’t go and think thematically and then go down and try to find stocks that fit.”

Put another way, the two consider themselves “good ‘meat and potatoes’ investors”, and look for businesses they can understand.

Mr Keelan and Ms Clarke will be joining us for ‘The Insider: Meet the Fund Manager’ on Friday 10th of September at 12 pm (AEST) where they will discuss their 3 favourite stock opportunities, market views for the year ahead and investment strategy and approaches. This will be followed by an interactive Q&A. Book here.

‘The Insider: Meet the Fund Manager’ is a free webcast series which gives you direct access to prominent fund managers. This session is live and interactive and includes a live Q&A. Spots are limited, so please book into this session as soon as possible.

 

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