Investment decisions are based on companies that are identified as high quality businesses. According to the fund a company is considered high quality when it generates strong cash flows, creates high return on invested capital and has long-term growth potential.
An intensive due-diligence research process allows us to apply a high-conviction investment strategy. We invest in 25-35 companies that we consider having the best prospects for strong long-term investment returns. Over a full market cycle (which we define as the stock market going from peak-to-peak in 5-7 years), we aim to exceed the total return of the benchmark – MSCI World Small-Cap index – by 3% per annum.
Our definition of small-caps is based on the global universe in which we invest. We avoid getting trapped in stocks that cannot be sold by limiting ourselves to stocks that have enough liquidity to trade in and out without significant market impact. Geographical & sector allocations are driven by stock selection while avoiding extremes.
We invest as entrepreneurs and consider each investment a long term holding. Our focus is on a company’s long-term prospects, rather than the next quarterly results. Avoiding permanent capital loss is key to achieving strong returns.
That’s why we stick to the following principles:
- We build our portfolio with shares at a significant discount to our calculated intrinsic value;
- We only invest in companies with specific characteristics such as possessing intellectual property, brands, and recurring revenues;
- We look for management teams that are aligned with shareholders and have a proven track record;
- We must be able to understand a company’s business model. Simplicity is a great advantage. That’s why we generally stay away from sectors such as biotech;
- We determine whether management is in control of its most important value drivers. As a practical example, a mining company generally isn’t;
- We avoid unproven businesses, single-product companies, and companies in need of reinventing themselves every 5 years.
Environmental, social and governance (ESG) issues are fully integrated into our stock selection process. We are signed up to the United Nations-supported Principles for Responsible Investing (UN PRI) and support the UN Global Compact. Read more here.