Small Company Investing

smallcompany

investingG L E N N O N C A P I T A L

C O N T E N T S

[definition] small caps

characteristics of small cap

investing

how to choose a small cap manager

why invest in a managed portfolio

the impact of market timing

differing investment styles

about glennon capital

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S M A L L C A P I N V E S T I N G

Small caps are companies that are listed on the Australian

Securities Exchange (ASX). The term “small cap” refers to the

small market capitalisation of the companies. These are not

well know companies like Telstra and Woolworths and many

investors would never have heard of these businesses.

The most common way of measuring the performance of

small caps is the S&P/ASX Small Ordinaries Index, which is an

index of the next 200 largest companies following the 100

largest stocks. Usually these are companies with market

capitalisation of less than $2.5 billion.

Outside of the Small Ordinaries are the “micro caps.” These

are even smaller companies and are generally below $100

million in market capitalisation.

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[ D E F I N I T I O N ]

G L E N N O N C A P I T A L | S M A L L C O M P A N Y I N V E S T I N G

O F S M A L L C A P I N V E S T I N G

The daily turnover in small cap stocks is lower than larger

companies. This liquidity issue means that there are greater

risks involved with investing in small caps - short term traders

have often been hurt by this lack of liquidity. Therefore, small

caps lend themselves to longer term investing.

Fund managers can often find liquidity by working with stock

brokers to find buyers and sellers of shares in larger volumes.

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C H A R A C T E R I S T I C S


LIMITED LIQUITY

Unlike the top 100 companies, small companies are not as

well covered by research analysts as the larger companies.

Consequently, there are more opportunities to discover

attractive investments at discounted valuations.

There are also more opportunities to fall into value traps,

companies with highly volatile earnings and fraud. This

means small company investing is best left to a specialist.

LIMITED RESEARCH

C O N T I N U E D . . .

C H A R A C T E R I S T I C S O F S M A L L C A P I N V E S T I N G

Smaller companies are often able to grow quicker than larger

companies; they generally start with a smaller base. This

growth can mean that quality small companies can become

large companies over time while investors benefit from strong

returns.

Investors need to be careful however: expectations of growth

can sour quickly and assessing the likelihood of the company

achieving its objectives is critical.

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C O N T I N U E D . . .


GROWTH

A S M A L L C A P M A N A G E R

H O W T O C H O O S E

There are a few basic considerations that need to be

considered when choosing a small cap investment manager:

Investing in small companies is as much about knowing the

management of companies as it is about financial analysis.

Avoiding mistakes is as important as selecting good

companies. There are many instances where a company may

appear cheap, but management may not have the interests of

shareholders in mind.

EXPERIENCE

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C O N T I N U E D . . .

One of the difficulties with investing in small companies is

liquidity. The more money a manager has the more difficult it

is for that manager to do well. It is widely accepted that once

a manager has more than 1% of the index, their investment

universe becomes constrained.

FUNDS UNDER MANAGEMENT

H O W T O C H O O S E A S M A L L C A P M A N A G E R

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C O N T I N U E D . . .


The investor needs to be comfortable with the basic

philosophy of his manager. This ensures that when times are

tough, the investor does not leave the manager at precisely

the time when opportunities for that manager are most

plentiful.

PHILOSOPHY

M A N A G E D P O R T F O L I O

W H Y I N V E S T I N A

The smaller a company, quite often the greater the ability for

a company to grow at rates of growth faster than the broader

economy. Capturing this opportunity is not simple however.

Risk needs to be managed as returns are achieved.

POTENTIALLY HIGHER GROWTH

A managed small cap portfolio provides retail investors with

diversification to their mostly large cap holdings. Because

prices of small cap stocks are highly volatile, a small cap

manager can respond to these price movements and take

advantage of opportunities that present themselves.

A small cap portfolio should be managed by a full time

professional manager because the environment can change

rapidly. Small companies are more vulnerable to company

specific and macro variables. Their revenue streams may be

more concentrated on a particular client while abrupt

changes in management may have a big effect on the

company’s prospects.

SUPERIOR MONITORING

UNIQUE OPPORTUNITIES

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O F M A R K E T T I M I N G

T H E I M P A C T

Historically small companies have had a tendency to

outperform larger companies in periods when the economy is

growing or recovering from a slow down. However, it is very

hard to time market movements.

As opposed to trying to forecast broad market movements, it

is usually preferable to select individual quality stocks that

have the ability to grow earnings over time. That is how small

companies become large companies over time.

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I N V E S T M E N T S T Y L E S

D I F F E R I N G

Quite often one manager’s style will suit a certain set of

market conditions resulting in favorable returns for those

conditions. Selecting the manager with the best immediate

past performance may result in continually selecting

managers who will be out of favour for the immediate future.

This can be likened to shutting the stable door after the horse

has bolted.

For example, managers who were overweight small

technology companies in the ten years to 2000 would have

outperformed, while the manager who was overweight small

resources during that time would have underperformed. But

if the investor switched to the technology-biased manager

after this period of strong performance he or she would have

been sorely disappointed with future returns.

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G L E N N O N C A P I T A L

A B O U T

Glennon Capital was founded in 2008 by Michael Glennon.

Previously, Michael worked with some of the best

institutional small company fund managers in Australia, and

in 2007, he was recognised for his achievements and received

the IMCA Money Management Fund Manager of the Year

(Small Cap) Award.

Michael founded Glennon Capital to offer specialist small

company investment management to high net worth

individuals and family offices, as well as through selective

platforms for clients with less than $1 million to invest in their

portfolios.

Today, our flagship fund Glennon Small Companies Limited

(ASX:GC1) opens up the investment opportunity for all. GC1’s

Initial Public Offering was completed in August 2015 and GC1

is now a listed investment company that is traded on the

Australian Securities Exchange (ASX).

We are proud to be recognised for co-investing with clients in

all portfolios – an important feature which ensures that our

values and principles are aligned with those of our clients.

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C O N T A C T

address

level 17

25 bligh street

sydney nsw australia

phone

(02) 8027 1000

email

info@glennoncapital

website

glennon.com.au

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Small Company Investing

Economy & Finance

Transcript of Small Company Investing