Avoiding disasters is just as important as capturing the great returns when it comes to investing in the Australian small caps, according to newly established Australian boutique fund manager, Lennox Capital Partners.
Lennox, which was created in partnership with Fidante, and launched its small-cap strategy in May, said that the small cap segment of the equity market offered great opportunities for wealth creation but at the same time it was inefficient in the short-time as it failed to appropriately price the change.
The company’s co-founding principal, James Dougherty, said: “There’s always change occurring everywhere, whether it maybe the structural change in the industry or the change specific to a company or maybe it’s a cyclical economic change – the information flow to the price doesn’t get there quickly enough so it’s inefficient.
“And we can exploit those inefficiencies through doing our own earnings forecast and taking that medium-term view,” he said.
“We always think about that avoiding these disasters is just as important as capturing the great returns because you don’t want to dilute the good work you do, and that is a big part of our job and that’s what passive investing in our part of the market doesn’t do, it’s not selective. Dougherty said.
Lennox sought to invest in the companies that would be well-managed, well-governed, would not have significant regulatory or environmental, social and governance (ESG) risk, and which could demonstrate all the quality factors allowing to forecast their earnings for the next three years.
Additionally, all the companies would need to pass the four-factor test which would examine the quality of their management, the nature of the industry they operated in, the quality of its earnings and their sustainability.
“We are trying to measure a company’s risk of a negative surprise. We are trying to avoid those events so if we think that there is a significant risk in a company, we will stay away from that company.
“We are assessing the companies on those four factors, they must pass management and sustainability and then they must pass at least one of the others,”
The fund would also allocate a certain portion to institutional investors like super funds but both Dougherty and Donohue said they would like to keep a certain capacity in the fund for retail investors so they could invest in the fund through financial advisers or directly.
Further plans also included establishing ratings with Lonsec and Zenith by the end of this calendar year and through its partnership with Fidante establish the fund on the relative platforms.