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:
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.