Prime Value targets retail investors with microcap fund

Prime Value Asset Management has launched a retail fund investing in microcap companies, a new version of its existing wholesale offering.

The Prime Value Microcap Fund is built on the same investment strategy and managed by the same team utilised for the firm’s SIV Emerging Companies Fund, which was established in 2015.

Targeting smaller ASX-listed companies, Prime explained the new fund is intended to help retail investors “capitalise on the strong alpha producing potential” of small-cap stocks.

The majority of holdings in the fund are in companies with a market capitalisation below $500 million, targeting quality stocks while avoiding speculative stocks, including mining.

This strategy, the firm said, is reflected in strong measured risk below the ASX Small Ordinaries index despite the fund’s focus on microcap stocks.

The fund’s portfolio managers, Richard Ivers and Mike Younger, said recent years have seen small-cap stocks underperform, creating attractive valuations for investors.

“Some microcap companies are trading at single-digit P/E ratios with double-digit earnings growth and delivering a good dividend yield,” Ivers said. "As the cycle turns, these stocks are likely to rebound strongly. It will come quickly. But investors need to be invested first to benefit – once microcaps start running it’s generally too late to get in.”

According to Ivers, microcap stocks provide an opportunity for investors to exploit an inefficient part of the market, stating that there is “a lot of scope for active managers to generate alpha” through smaller companies.

“The fund is also positioned to capitalise on market swings so investors can enjoy the significant uplift which occurs when microcap stocks run, and we know they can run early and run hard compared to the larger companies”, he said.

Adding to this, Younger argued that microcaps are now performing in a similar way to small-cap stocks as 20 years ago, “they are less researched, less well-known, and give managers an opportunity to differentiate and add value”.

“There is a ‘sweet spot’ in the lower risk part of the microcap market, via quality companies with resilient earnings combined with a strong growth outlook," he said.

Noting considerable early interest in the fund, Younger said there are very few microcap funds available, and even fewer which target quality companies and growth while managing downside risk.

The Prime Value Microcap Fund is expected to be available on several platforms in the near future.