Small businesses are often the most vulnerable in an economic downturn, but that doesn’t mean there are no opportunities for investors. But the key is being able to identify those stocks with good long-term prospects that will survive the current downturn, as is the case with this year’s winner, Schroders Investment Management.
Schroders portfolio manager David Wanis said a point of difference for his fund was its research process.
“Our overall research process doesn’t distinguish between large or small caps,” he said.
“If that initial research is applicable to a small cap we then undertake a full review.”
Wanis said the danger of just researching small caps is that a stock can look good based on that segment’s criteria while missing the bigger picture.
“This is why we like to look at all stocks and then filter the small cap stocks,” he said.
“We use a uniform considered research process.”
The robust research model attracted Lonsec when judging the category.
“Lonsec regards Schroders overall research capability to be relatively high,” the researcher said.
“Schroders broad cap (research) approach means the investment team is somewhat larger and better resourced than the majority of peers assessed.
“This is most apparent in the lack of aggressive screening to produce manageable analyst stock loads.” Wanis said while other managers were seeking alpha, Schroders was looking for risk-adjusted returns.
“In the small caps sector, there are always risks and last year there was considerable risk concentrated in the resources sector,” he said.
“We have taken a broader investment approach to those risks to deliver an adjusted return.”
Schroders is also looking for companies that will survive the recession despite some rough years in the short-term.
“We are looking for companies that might be doing it tough now, but will come out of the recession stronger,” Wanis said.
“If the fundamentals are right, we look at the investment for the long-term, not just what is happening tomorrow.”
Conducting its own research, Ausbil Dexia believes it can deliver outperformance in the small caps sector.
“We run our own research program looking at both qualitative and quantitative views on stocks,” Ausbil Dexia associate director retail, Mark Knight, said.
“We also believe visiting companies to properly understand what they do is another key to delivering value to investors.”
Buying the highest quality business for the portfolio is the focus of Hyperion Asset Management, according to institutional business director Tim Samway.
“We are trying to buy the highest quality businesses, but that is very difficult in the small cap market,” he said.
“We are looking for companies with strong balance sheets, top-line growth and some sustainable competitive advantage.”
Samway said the manager prefers companies that achieve organic growth rather than expanding by acquisition.
“We don’t buy blue sky companies. We want a stable management team and are not impressed by a star coming in with no knowledge of that industry,” he said.
