WHY INVEST IN SMALL COMPANIES ?
The long term
investment case for small companies is a compelling one. Since 1955,
the Hoare Govett Smaller Companies Index, i.e. the bottom 10% of the
market, has outperformed the FTSE All Share Index by an average of 3.2%
per year on a total return basis.
As a specialist
small cap manager Chelverton believe that the sheer diversity and number
of investment opportunities provide significant scope to add value for
our clients through our disciplined investment approach.
The approach is based around a number
of factors specific to the investment universe :
-
The real opportunity for
smaller company investors lies in the pricing inefficiencies created
by the relative lack of data on the 1,500 or so quoted small cap stocks.
Sell side economics makes independant research into smaller companies
relatively rare and this provides a signficant opportunity for specialist
buy side managers, such as Chelverton.
-
There are few reliable earnings
and cash flow forecasts for smaller companies that extend to anything
further than a short-term horizon. By looking to hold stocks over
the medium term, Chelverton can look beyond this and add value where
the market becomes increasingly inefficient.
-
New issues will continue
to offer small cap investors a broad range of opportunities, but we
find that a lot of these can be over-hyped and over-priced. Of more
interest to Chelverton is participation in equity fund raisings where
we know the companies well, and in re-financings. In both of these
instances Chelverton are often able to access equity at a discount.
-
Relative illiquidity in
smaller companies means that disappointing news can often have a disproportionately
adverse affect on a share price. By focusing on tangible medium term
investment parameters, especially cash flow, these temporary disappointments
can provide Chelverton with attractive investmnet opportunities.
