Bet­ting on smaller stocks

This spe­cial­ist eq­uity fund seeks to achieve max­i­mum cap­i­tal ap­pre­ci­a­tion by in­vest­ing in com­pa­nies with small- to mid­sized mar­ket cap­i­tal­i­sa­tions and who dis­play the po­ten­tial to de­liver above-av­er­age earn­ings growth. FUND IN­FOR­MA­TION:

Finweek English Edition - - MARKET PLACE - Ed­i­to­rial@fin­week.co.za

Fund man­ager in­sights:

The ideal in­vestor for the San­lam In­vest­ment Man­age­ment Small Cap Fund is one with a longer term in­vest­ment hori­zon and a slightly higher risk ap­petite, i.e. tol­er­ance for some volatil­ity in re­turns, says Vanessa van Vu­uren, port­fo­lio man­ager.

The fund fo­cuses on se­lect­ing in­vest­ments with a long-term out­look and will seek to grow in con­junc­tion with the in­di­vid­ual com­pa­nies se­lected, such as early-stage com­pa­nies that are slowly evolv­ing into medium- to larger-sized busi­nesses over time, ac­cord­ing to Van Vu­uren. “This in­vest­ment process re­quires pa­tience and tol­er­ance for some pe­ri­ods of un­der­per­for­mance or losses, but is ideally re­warded over the medium to long term with an at­trac­tive re­turn pro­file.”

The fund can ef­fec­tively se­lect and in­vest in any share out­side of the JSE Top40 In­dex. Cur­rently there is an op­por­tu­nity set of ap­prox­i­mately 262 shares out­side of the Top40, bro­ken down as fol­lows (the in­dex com­po­si­tion changes quar­terly): the JSE Mid Cap In­dex (57 shares), JSE Small Cap In­dex (58 shares), JSE Fledg­ling In­dex (119 shares) and the JSE Alt-X In­dex (28 shares).

Van Vu­uren says the fund is pre­dom­i­nantly skewed to­wards higher qual­ity smal­land mid-cap shares that they be­lieve are un­der­val­ued by the mar­ket rel­a­tive to their as­sess­ment of the long-term in­trin­sic value of these se­lected in­vest­ments.

The in­vest­ment phi­los­o­phy, ac­cord­ing to Van Vu­uren, “does not sim­ply in­volve look­ing at quan­ti­ta­tive val­u­a­tion met­rics”, but is rather fo­cused on “holis­ti­cally un­der­stand­ing each in­vest­ment and its po­ten­tial evo­lu­tion as a busi­ness and what we es­ti­mate this could be worth in the medium to long run”.

“A strong fo­cus on un­der­stand­ing risk and the po­ten­tial for cap­i­tal loss is core to our in­vest­ment phi­los­o­phy,” she adds. Van Vu­uren says the gen­eral in­vest­ment en­vi­ron­ment for small- and mid-cap shares re­mains con­strained by a weak macroe­co­nomic back­drop and a con­sumer who is un­der con­sid­er­able pres­sure. She says the fund tries to “in­su­late” the port­fo­lio from the weak macroe­co­nomic dy­nam­ics by se­lect­ing in­vest­ments that they be­lieve of­fer some re­silience or are some­what in­su­lated by these broad dy­nam­ics due to com­pany-spe­cific nu­ances and the se­lected in­dus­tries in which they op­er­ate.

“We are es­sen­tially look­ing to in­vest in busi­nesses that we can un­der­stand – that have a de­fin­i­tive com­pet­i­tive ad­van­tage, gen­er­ate high re­turns on cap­i­tal and good cash flows, have ro­bust growth po­ten­tial and are well man­aged by own­ers and or man­age­ment who are good cap­i­tal al­lo­ca­tors.”

Why fin­week would con­sider adding it:

The fund re­cently won the Rag­ing Bull Award for the Best South African Eq­uity Mid and Small Cap Fund. This is awarded to the fund that gen­er­ates the high­est re­turn in the do­mes­tic col­lec­tive in­vest­ment scheme sub-cat­e­gory of “South African Eq­uity Smaller Com­pa­nies” over a rolling three-year pe­riod to the end of De­cem­ber ev­ery year.

The SIM Small Cap Fund has won this cer­tifi­cate for the last two rolling three-year pe­ri­ods end­ing 31 De­cem­ber 2015 and 31 De­cem­ber 2016.

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