Lonsec picked first-time winner in this category, Perennial Value Smaller Companies Trust, out of the crowd of competitors thanks to its strong, sustained performance and 6.7 per cent excess returns.
With a focus on capital preservation, the fund screens out highly leveraged, poor management companies, as well as ‘concept stocks’, to find quality small companies with sustainable businesses that are trading at a discount to valuation.
The portfolio managers, Grant Oshry and Andrew Smith, work closely with Perennial Value Management’s (PVM) large cap team to give them a broader depth of coverage than they would otherwise get, a relationship noticed by Lonsec in anointing the winner of the small caps category.
“PVM exhibits many characteristics that Lonsec looks for in a boutique, such as equity ownership by the investment team, a strong alignment of interests, and an investment-orientated culture,” the research house said.
Oshry agreed with the remark.
“When we set up this boutique, we ensured that key personnel owned direct equity in the business, so our interests are clearly aligned with our underlying investors.
"But a number of other analysts, because they own equity in Perennial Value and Perennial Value owns equity in smaller companies, they have direct incentives to the success of the fund,” he said.
The support of PVM’s wider team of analysts is a key point of difference between the Smaller Companies Trust and some of their peers in the industry, according to Oshry.
All the fund managers are also personally invested in the fund on a voluntary basis, and pay full performance fees for its performance, Oshry said.
The small size of the fund – it has $350 million in funds under management (FUM) – allows it to move nimbly in and out of the market and react much more quickly to the flow of news.
“It won’t limit us in terms of our investment choice. We invest in a company with a market cap of $50 million, whereas some of our peers running a $2 billion fund, if they own 10 per cent of a company it will give them a $5 million exposure, and that’s too small.”
The fund will close off at $750 million in FUM from retail and wholesale flows. That will leave them at one-third the size of most of their peers, Oshry said.
Runner-up in this category was the Pengana Emerging Companies Fund.
“Our whole philosophy is based around company contact; we have an exhaustive company visitation program,” said Pengana Emerging Companies Fund manager Steve Black.
Pengana Emerging Companies Fund visits on average 400 to 500 companies a year. The fund managers look for mispriced securities, companies that are too small for large brokers to look at, or that are not well covered.
“It’s about quality management with good franchise businesses,” Black said.
While he admitted this was something of a ‘needle in a haystack’ approach, a target market of companies with approximately $30 million in capital made no other approach possible, Black said.
The fund contains approximately 50 to 60 stocks.
Small-cap companies only have small contracts or small numbers of customers, so the analysts need a greater understanding of the quality of management if things go wrong quickly, Black said.
Runner-up Celeste Funds Management chief investment officer Frank Villante said the Australian Small Companies Fund had used a very consistent management process for a number of years.
“We apply it day-in and day-out, irrespective of market mood or equity market economic cycle, so I think we’re fairly diligent in what we do, and fairly focused on what we do,” Villante said.
Their success at generating excess returns was a combination of the right people and the right process, he said.
