Luke Winchester is a fund manager who likes to know more about the companies he buys than just about anyone else on the market.

Although researching a business before buying (and staying up to date while holding) is important for anyone with a share portfolio, Mr Winchester tries to make sure he’s in the most well-informed 1% of people on a particular share before buying.

It’s a strategy he uses to maintain an edge in markets and answer the one central question he believes all investors must ask themselves before taking a stake in a business:

“Why does the opportunity exist; what is the market missing?”

This approach sits at the centre of Merewether Capital, the funds management business run by Mr Winchester, which is about to launch its inception fund later this year.

Speaking to Reach Markets ahead of his appearance on the fortnightly The Insider: Meet the Fund Manager series, Mr Winchester said knowing a business inside out gives investors the “potential for an edge” over the market. 

“That’s always my way of thinking,” he said.

“I always want to have an edge on the market, and I think that particularly applies to microcaps because it’s almost impossible to compete at the big end of the market because of the flood of information available to some people.”

The microcap sector fortunately offers investors like Mr Winchester the chance to speak directly with management and get a first-hand look under the hood.

Looking past the numbers

At last check, Mr Winchester said there were around 400 companies – excluding resources and biotechs – on the ASX with market capitalisations below $200 million (where he likes to focus his trading). 

To work out which of these businesses are worth putting in a phone call to, Mr Winchester looks for ones that are profitable (or close to being so), that have little to no debt, and a bit of growth.

Even so, he tries not to be too prescriptive with the checklist he uses to weed companies out.

“I don’t like to do things like say ‘you must have a minimum return on equity of 20%, you must have grown earnings for three years straight’,” he said.

“If you start to put stuff like that down, you start to filter out ideas that don’t perfectly meet that filter – and a lot of microcaps won’t. 

“A lot might have one rough year out of three, or there’s often something hidden behind the numbers that you have to do that little bit of work to find, that won’t show up on a screen or on a filter.”

Instead, Mr Winchester tries to look into them himself, often making note of the people in management or board positions, or who the other investors in a business are, to help guide his decisions.

“You start to know people. You see familiar names pop up on different boards, or different investors in different stocks, so you build up this base of who’s a good operator, who’s not, what’s an interesting idea,” he said.

Luke Winchester will be joining Reach Markets for The Insider: Meet the Fund Manager on Friday, 8th October, at 12pm (AEDT) where he will discuss Merewether’s three favourite stocks, why looking beyond hard numbers can help identify potential high-performing stocks and how sticking to market trends could prevent investors from gaining an edge in the market. This will be followed by an interactive Q&A. Book here

The Insider: Meet the Fund Manager is a free webcast series that 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.

Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets position. Any advice contained within this presentation is general advice and does not consider your personal circumstance, you should consider whether it’s appropriate for you. The information we are giving you is for educational purposes only. “Investing is about understanding your risk” and every time you invest in the share market there is a risk of loss.